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Kids and Finance

Matthew Kulp, CFP®, CEPA® | August 7, 2020

Part I

COVID-19 has forced me and my family the choice to embrace or reject. We’ve chosen the avenue to embrace this opportunity. One of those opportunities is furthering our kid’s education in finance (let’s call this a “home school” project 😁). Monopoly, yes Monopoly, is a great way to teach kids about the basics of finance and it’s fun, especially if you win! Help your family learn the basics of cash flow management, debt management, rent vs. own, equity and taxes just to name a few. Believe it or not these simple building blocks can help develop your kids for the future and how they handle their money. Good luck!

Part II: Allowance

In full disclosure as a teen I received a consistent allowance each week based on a number of expected chores… Looking back this was nice, but I think there is a better process to motivate kids. Personally, I am not a fan of paying kids an allowance. My wife and I have developed a simple structure for our kids that requires them to contribute to the household while also being availed of the opportunity to earn money. It’s fairly simple and straightforward.

Expectations and Contributing to the Household
Each child has a given number of chores that we expect them to complete on a daily or weekly basis. This is their contribution to the house or the “table stakes”. Chores may look like this: Making THEIR bed, keeping THEIR room clean, doing THEIR laundry, putting THEIR dishes into the dishwasher, etc.

Earning Money
The child’s contribution to the household affords them the opportunity to earn a job/project which provides them the opportunity to earn money. If they fail to contribute to the household they are not afforded the opportunity to earn a job, simple as that. In a short time you will see which kids are motivated to earn money. Here are a few jobs/projects for pay:
– Mowing, mulching, weeding flower beds, power washing, washing a car, making breakfast, lunch or dinner for the family, cleaning the house (or a room in the house), vacuuming, laundry, etc. Every child is different and some will need reminders more than others, so don’t hesitate to help your kids develop a schedule.

How do we help our kids balance between spending and saving for the long-term at a young age?

Part III: Goal Setting and Savings

So now that your child is bringing value to the household through daily chores and earning money for jobs or projects around the house, where should they put their money?

My wife and I believe it is our responsibility as parents to provide direction and insight to our kids to help them make prudent money decisions around spending and saving the money they work hard for. I have spent 18 years in financial services and it is safe to say through experience that the majority of Americans are focused more on spending than saving. Spending drives our economy, but at the same time many if not most Americans have underfunded their retirement. So how do we help our kids balance between spending and saving for the long-term at a young age?

First, let’s have a conversation on setting goals. Goals should be kept simple and attainable to start and categorized as short-term or long-term. Here are a couple of ideas on goal setting

Establish a checking account – For minors, this is called a UTMA, Uniform Transfers to Minors Act, essentially this setup allows a minor to open an account with a parent or guardian as a custodian until the child turns 21 years of age. We set the precedent for our kids that in order for them to establish a checking account they must reach a savings goal of $100 in money saved. The checking account is the “spending” account and can be used for items they want to purchase for themselves, gifts for others, and giving to charity. This can also be a fun account to establish purchase goals for your child. Logistically the UTMA checking accounts are linked to my checking account. If a child desires to spend money from their checking account I transfer the money from their checking to my checking account and I give them the cash and they purchase the item. Mentally, this is a great exercise for the child because they see their hard work paying off but also feel the pain of seeing money go out of their hands.

For example, our son deeply desired a PS4 and our message to him was “if you really want it, you need to earn it.” So… he set a goal to purchase a PS4. He researched the price and found out he could buy a refurbished PS4 for $150 less than the price of a new PS4. Needless to say, he was motivated! He accomplished his goal in less than 6 months by means of shoveling driveways and spreading mulch for the neighborhood. He even exceeded his savings goal which leads us to the next savings outlet. Establish a Personal Investment Account – this account is also set up as a UTMA account just like the checking account. The rules and accessibility are the same as the checking account; the only difference is how savings are invested. Expectations and incentives are very important to communicate. We communicated to our kids that the investment account is a long-term account defined as an account that they would not access until at least the age of 21. I am the custodian, which also means I have control of the account and what it gets used for until they are 21. This account is targeted to be used for a first home, wealth accumulation, future investment into a business or possibly even retirement, time will tell!

So why would a child be motivated to save into an investment account if they can’t touch it for a long time? Just like many of us are motivated to fund a 401k for the match (and obviously retirement), we developed an incentive program to match contributions into this account. For kids that begin to understand the value of a dollar and sweat equity, they will quickly appreciate the value of a matching contribution. For example, every dollar they invest they will receive a matching contribution of 25% or whatever percent you are comfortable with. Keep in mind matching contributions are made for the investment account only NOT the checking account. To help our kids see the potential fruits of their labor and illustrate the power of compound interest we ran a couple of future value calculations of what their accounts could be worth. To say the least, the look on their face was priceless! In the next article, we will discuss how to review accounts with your kids.

Part IV: Encourage and Build

The final phase of helping kids embrace finance is to encourage and build. The excitement of earning money can lose its luster if you don’t help your child keep track of earnings. To be sure the motivation lasts to utilize these helpful steps.

Encourage

Keep track of your child’s earnings using a piggy bank or electronically keep a tally. Help them see the nest egg they are building. Personally, I use the “Notes” app on my phone to track their earnings. When a child desires to add money to their checking account I make a transfer from my checking account that is linked. If they want to add money to their investment account I cut a check. I will pay some earnings in cash but I try to avoid cash because of mishandling.

Build

The investment account is an opportunity to teach your child about compounding growth over the long-term as well as learning to handle the market “ups and downs”. Each quarter when investment statements arrive I spend 5 to 10 minutes with my kids reviewing their investment statement. They are excited to see the value of the account, as we know with market volatility focusing solely on the value account could be discouraging. However, I turn the focus to the number of shares they have acquired through additional investment, dividends, and interest. It’s critical to help them understand that when the value of the account declines the number of shares they have did not decline, only the price declined. If money was added to the account they will see in the transaction section of the statement that shares were purchased at lower prices. Remember, the investment account is a long-term account so we must take a long-term view, focus on building shares.

Good luck to you and your child in the financial journey!

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