Haven’t you wished you know back then what you know now when it comes to the financial aspects of your life? I reviewed my personal finance history to examine the various reasons of my financial mishaps during the early stages of my life. One of the reasons, sad to say, is that my parents were not “financially literate,” so to speak, so there was nothing for them to educate me except teach me how to open a savings account. Don’t get me wrong, I am not blaming my parents; I’m just reiterating the fact that we live in a society where we don’t become fully aware of all our finances until we start to raise a family and then begin to experience the struggle of juggling our finances. As it turns out, majority of the parents and their children are in the same boat as I am. Here is a very good example:

I used to work at McDonald’s as an Assistant Manager and dealt with a lot of teenagers. Out of a hundred of kids, only one, believe it or not, was saving for an IRA via a mutual fund. The reason being, he was educated by his CPA father! The rest of the kids were either buying brand new cars or just plainly spending their money effortlessly. Or when they saved, they were probably keeping it as cash or in an account with a very low rate of return. - KRG

Although you can’t go back in time to correct your mistakes, you can surely prevent this from happening to your kids and here are some suggestions that you may find useful:

1.) Get involve in filing a petition for a curriculum change in school.
Parents should take a stand and file a petition to include finance courses in high school. Most parents are not financially savvy so having a course in school will help kids to have some exposure with the subject. Learning personal finance course should be as important as learning math and science classes, because finance is something that students would be grateful to learn due to its immediate and continuous application in their lives.

While you’re waiting for this to happen, you should take a look at suggestions 2 thru 4 since these are the things that you can control.

2.) Teach your kids how to save at an early age.
We are a creature of habit. If we instill these values in our kids while they’re still young, chances are they’ll grow-up carrying these values. For starters, a piggy bank would work just fine. You can also open a bank account for them and encourage them to save some of their school allowances.

 3.)Educate Kids with simple financial matters.
You don’t want to overwhelm kids while they’re very young. But when they reach the age (usually in the teens) good enough to understand the subject, you should try to do such thing. You should be able to teach them with simple financial matters such as saving for a rainy day, the importance of having a good credit, minimizing the use of credit cards, budgeting, frugal living, saving for retirement, etc. Better yet, try to get them involve with your budgeting decisions so at least they know why you’re cutting down expenses. They may have suggestions that you might not thought about and be more willing to implement those. Financial awareness should be part of your counseling just as you would advise your kids about not smoking or not taking drugs.

Note: Since most kids learn more when they’re having fun, some parents have tried the boardgame“The Game of Life” as a starting point in introducing finances to their kids. It’s a classic boardgame that breaks down an entire lifespan into a series of choices and chance. Also, it encompasses various decision making like “should I go to college and take student loans or join the workforce and collect payday?”

4.) Encourage your kids to work when they become eligible.
So they can make the maximum contribution (whenever possible) to a Roth IRA. My previous article Saving for Retirement: the Earlier the Better, demonstrated why you should start saving for retirement as early as you can. The advantage of starting early is that it would give you an option to terminate your contributions early, if you wish to, so you can use the additional money towards your other financial goals. If the kids start saving at the age of 16, imagine how much money they can accumulate come retirement time?

Remember the rule: the more time you have, the less money that you’ll contribute to achieve the same accumulated goal (assuming the rate of return is the same throughout) - KRG

Why Roth IRA? The IRS set-up all retirement plans so that the individual can choose whether to pay taxes now on the contributions to or pay taxes later on the distributions from the retirement plan. In a Roth IRA, the contributions are taken out of after tax salaries but the benefit is you don’t get taxed when you start taking money out come retirement time. However, because most kids who work during summer time will probably not make over $5,000 and the fact that individuals, who are single and can be claimed as dependent by another, are not taxed for the first $5,150 (standard deduction in 2006) of their income, then the contributions, technically, are not coming out of after tax salaries. Thus, most kids in this situation will have the best of both worlds- “No taxes on both their contributions to and the distributions from the Roth IRA. Who says everybody has to pay federal taxes on their retirement money?

Another advantage of an IRA is that kids can take out $10,000 (lifetime limit per person) of their retirement fund without incurring any penalty (assuming that the IRA has been opened at least five years) to purchase their first home.

However, children can only contribute to an IRA when they work. The parents cannot give their children money with the intention of using it to fund an IRA.

When are kids eligible to work? Most states allow kids to work at the age of 16. Also, some states allow kids younger than 16 years old to work but the job responsibilities are very limited. Because of these high job restrictions, companies rarely employ them. You should check with your State labor laws.

If you are a business owner – hire your kids earlier than the usual age. I learned this from my tax class professor. He has two kids, one 12 and another 14, and he hired both of them every summer to help out with the filing of papers, sweeping the floors or dusting the desk. The two kids each made $2,000 per year and my professor opened a Roth IRA account for them. Back then, the maximum contribution was only $2,000. Although those kids might not be aware of what’s going on at that time, I’m sure that they’ll be very grateful to their dad, when they start to understand, knowing that they are already set for life because of an early start for retirement.

Since you’re kids will be your employees, a W-4 needs to be filled out when hired and a W-2 (or a 1099 if they are hired as contractors) needs to be sent out at the end of every tax year.

What if the parents don’t have a business?
Eventhough money received from occasional gardening, housekeeping, and babysitting are generally ignored as income (and exempt from “Nanny” taxes), the salary earned from those jobs can qualify as earned income as long as adequate receipts and records are kept. You should consult a CPA or an EA if you have intentions of doing this as this maybe a complex tax issue.

Conclusion: 
I’m sure that you have more ideas than I do, but the important thing is that you educate your kids with these ideas. So come on and let’s break the financial illiteracy cycle in our family. These maybe the best inheritance that you can pass on to your children!!

Please read the disclaimer page. This post is copyrighted by Filam Personal Finance 2007

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