Saving is a habit that can be formed at an early age with proper guidance from parents.
A young physician client of mine in Maryland was employed part-time at his father’s company as a teenager. His father paid him a salary and also opened a Roth IRA for him, keeping him in the loop of this early investment experience. Every year, his father contributed for him and kept an open conversation with him about the importance of saving these funds for retirement, while also explaining the features of a Roth IRA to him, including the benefit of being able to withdraw the principal in an emergency.
During those starting years, my client didn’t have much knowledge or interest, which isn’t completely unexpected in a teenager, but over time he got used to the idea of saving and maintaining an account, particularly as he saw his funds growing. The client is now 30 years old and has been contributing on his own since he was 22. He started with the small amount in his Roth IRA, and with his annual additions and compound interest, the amount in the account is now significant. Besides raising a successful physician and overall great human being, his parents did well by him by teaching him the value of hard work, earned income, and saving. As his financial advisor, it makes my job easier as I work with him, since he has this solid foundation from which to build his continued financial success.
While often considered the realm of adult, experienced investors, saving is a habit that can be formed at an early age with proper guidance from parents. Family culture plays an important part when dealing with financial literacy and teenagers. Here are few tips to encourage kids to be financially savvy at an early age.
1. Hire them:
For self-employed physicians, they should consider letting their children work for them and pay them salary appropriate to their age. By hiring and giving children age-appropriate tasks within the business and letting them earn their own wages, parents can help them understand the value of money. Allowing children to earn and save provides them with the opportunity to learn how to use their own income, whether they choose to spend what they have or put some away to save for later.
2. Be a good role model:
When parents meet with their financial planners, it’s a good idea to let children sit in with them so they can begin to understand the different aspects of financial planning. Children learn what they are exposed to at early age. They can come to realize that good financial planning should be part of a regular routine and that it’s a vital part of adult life, like cooking or exercise.
3. Teach them savings habit:
With this appreciation and familiarity of good savings habit, it’s much easier to encourage teenagers to apportion part of their working income to a Child IRA; they’ll see it as something that will benefit them, rather than just a reduction of money they can spend immediately. Help them track spending: Part of being a better saver is knowing where your money is going. If a child receives an allowance, having them write down their daily purchases and adding them up at the end of the week can be an eye-opening experience. Trying to engage a tech-savvy kid? There are various free apps that can be used to track income and spending. Encouraging a child to think about money by touching base with them periodically about how they’re spending can work to make saving an ongoing habit
4. Give them allowance:
Offering allowance money in exchange for chores also teaches children the value of their hard work . Parents can give weekly allowance to their kids to complete certain tasks for the family and deposit the money in their accounts. Children learn the value of hard work and money at home.
5. Encourage them to take online classes about credit score and budgeting:
Parents tend to spend a lot of money on extracurricular activities like karate or swimming lessons for their children, which are important to a child growing up well-rounded. However, parents can sign their children up for in-person or online classes focused on financial wellbeing as well. Children absorb knowledge well at a young age, and financial education aimed at young people will present the information in an engaging way that isn’t all graphs and charts. An online class is an easy way to introduce kids to the importance of saving in a different setting, and sometimes children are more open to lessons, particularly about money, that come from someone other than their parents.
6. Open ROTH IRA for Children:
Educating children at early age about the important of saving money can shape the future thinking and habit of the child and can increase wealth for the family. If the children have earned income, they can qualify to open ROTH IRA for themselves which can be an ideal financial account for children.
Financial literacy is the key when it comes to educating your children about money. Some high schools offer classes about investing, using fake points as a benchmark of return to let teenagers work through the conceptual aspects of the market, and in some schools, students can even join investment clubs to take a deeper dive into playing with investment and planning. However, generally there aren’t universal programs in schools that focus on the importance of saving and budgeting with an emphasis on strategies that can be applied practically. But raising a moneywise child is not a daunting task if it can be broken down in small steps and start early.
Syed Nishat is a partner, Wall Street Alliance Group. He can be reached on LinkedIn and on Twitter @syedmnishat. He holds the FINRA Series 7, FINRA Series 63, and FINRA Series 66 licenses, along with licenses for life, disability, and long-term care insurance. Syed holds a bachelor’s degree from the University of Nevada, Reno, and has been awarded the Behavioral Financial Advisor (BFA) designation. Syed’s articles and interviews about asset protection and common financial mistakes by physicians were published in Medscape, Medical Economics, and MedPage Today.
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