Last time (Spend, Save and Share) we talked about setting up a system by which children divide their incoming funds into four categories: long-term savings, short-term savings, charity and spending. This week we are going to take a closer look at the long and short-term savings categories.
Long-term savings are to be used for college, a house, retirement -- stuff that is truly long term. Speaking from experience, kids are a lot less likely to take college for granted if it is their hard earned dollars that are helping to pay for it. It will also show them first hand the beauty that is compound interest. These funds can be added to whatever funds you are providing for their college education. Have your children help you keep track of the investments, being careful to point out how much of the pie was contributed by them. You should also know that new legislation makes saving for college even easier. More than 16 states have started programs offering tax-deferred investment plans for college and another dozen states are jumping on the bandwagon. These investment plans make saving for college as easy as socking away dough into your 401(k).
If you think it is too soon for your children to start worrying about retirement savings, think again. If your 15 year old child puts away $2000.00 in a Roth IRA every year for fifty years starting this year, the account will have nearly $2.3 million in it if it earns 10 percent per year and $4.8 million at 12 percent per year! By the way, you can set up a Roth individual retirement account for your child with your child's earned income. The account will be subject to tax rules that apply to him, but not you. It can be funded each year in an amount equal to his earned income or $2,000.00 whichever is less. Your child can earn up to $4,300.00 tax-free each year, though he will probably want to file a tax return so he can get back the taxes taken out of his check for him by his employer. If you are interested in opening a retirement account for your child, check with your financial advisor and/or accountant for more information.
The second category is short-term savings. This is where they put money they are saving for big purchases. This category has a unique ability to teach kids delayed gratification (what a concept!). If they want to go on a special class trip or buy a pair of outrageously expensive jeans or a new boom box, they can watch the funds for those expensive treats grow in their piggy banks (or jars or envelopes or whatever) until they can pay for those goodies. Just remember that while it may cause you to have a mild aneurysm to watch your child squander her short-term savings on a life size Ricky Martin doll or 6000 Pokemon trading cards or one pair of designer jeans, it is her decision to make. I can pretty well guarantee that your kids will tune out all of your money messages if you question their judgment in this regard.
My high school Home Ec teacher started her lecture on money management by scolding the class of 14 and 15 year old girls for spending money on "a twenty dollar pair of jeans with a forty dollar label." As she was dressed in an orange polyester suit, we immediately and unconditionally tuned out the rest of her money management lessons, which were probably pretty good.
Don't forget that as your children grow, their interests will change. Teenage girls and increasingly teenage boys care a great deal about fashion and it is their prerogative to do so. They will grow out of it, but you can't rush the process by criticizing their choices. The point here is to teach kids to prioritize, to save for what they want and to experience the pleasure of delayed gratification. That you also get to strengthen your relationship with your kids while increasing your children's self esteem by allowing them to make decisions important to them is icing on the cake.
Next time, we'll talk more in depth about the remaining two money categories, charity and spending.
Ms. Kletzman is a former family law attorney who is now a financial writer. She also has a web site that teaches parents how to teach their children good money management skills. Ms. Kletzman is the author of two money saving tip books entitled "101 Ways to Improve Your Bottom Line" and "80 Ways for Kids to Improve Their Bottom Lines," both of which are available on her web site.
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