By Darren Wurz
Preparing your kids for the reality of life can be one of the hardest aspects of parenting, especially when it comes to teaching them about money. Many people shy away from having conversations about money with their kids, but research shows that it can have lasting effects on their long-term financial literacy.
My dad decided early on that he was going to make financial literacy a key part of what he wanted to pass on to me, and his lessons have shaped me into the person I am today. He helped me learn the value of money from a young age, and I am passionate about helping my clients do the same for their kids. Here are 3 things my dad did for me and why you should consider doing them for your kids.
1. Help Your Kids Start Saving & Investing Early
I opened my very first savings account while I was still in elementary school, and by the time I was in middle school, my dad was helping me invest in mutual funds. My very first investments were in small- and mid-cap growth funds from AllianceBernstein. I didn’t know it at the time, but the lessons I was learning were invaluable. Not every kid learns the ins and outs of investing before they’ve even hit high school. My dad’s lessons laid the groundwork for what would later become my career.
I learned firsthand about risk, volatility, and compound growth. The earlier you start investing, the better. Most people learn this in their 20s and 30s, or don’t learn it all. But if you teach your kids from a young age, and actually help them start, you will be giving them a huge leg up when it comes to making wise choices about their money when they become adults.
If your kids work, help them set up a Roth IRA. With the standard deduction being so high, they may not pay any tax on their earnings. Even if they pay taxes, they are most likely in the bottom tax bracket so it makes sense to pay the taxes on any money earned upfront. By putting money in a Roth IRA, they can take advantage of tax-free growth for 40 years or more!
2. Add Your Child As an Authorized User on Your Credit Card
Credit can make or break the early years of adult life, and what many parents don’t realize is that starting out with no credit can actually be worse than bad credit. That’s why adding your kids as authorized users on your credit cards can be a great way to help them build credit in a safe and contained way. You don’t actually have to give them a card or let them make purchases. Adding them as an authorized user simply allows them to inherit your credit history and start off with a good credit score, without having to apply for or manage credit card payments themselves.
If you combine this strategy with active conversations about why you make certain decisions regarding credit, you can help them build wise financial habits that will last for life. Starting out with good credit and having a solid understanding of how to maintain that credit score can be extremely helpful when your kids go to buy their first car or home.
My dad did this for me and it helped me start my adult life with a great credit score in the 700s. I also was taught the habit of paying off your credit cards every month. Most of my peers started life with absolutely no credit history, and it took them years longer to qualify for the interest rates and other perks I was able to get right off the bat.
3. Hire Your Kids if You Own a Business
This strategy is advantageous for both you and your kids. Paying your kids is a great tax-minimization strategy because that money is considered tax-deductible for the business. In addition, each kid has their own standard deduction, meaning they can earn up to $12,950 tax-free. Not only that, but if you make them pay for certain things like sports or other extracurriculars, you are essentially writing off these expenses tax-free. You deduct the wages, your kid isn’t taxed on the income, and your kid pays for expenses you would otherwise pay out of pocket. It’s a win-win-win!
There are certain requirements with this strategy, however. You can’t just cut your kids a check for nothing. They actually have to do real work for the business and be paid a commensurate wage. You can’t give them $10,000 for an hour of shuffling paperwork.
Get creative about what your kids can do. For me, my dad paid me in the summers to do secretarial work like sending out mailings. It taught me the importance of a work ethic and how to work hard for the money I was earning.
We’re Here to Help
At Wurz Financial Services, we understand the importance of teaching kids financial literacy from a young age, and we’re here to help if you ever have any questions about how to talk to your kids about money.
Schedule a no-obligation consultation, and together let’s find out if we’re the right people for your family’s financial journey. Contact us at 859-291-9879 or firstname.lastname@example.org today!
Also, join us at one or all of our free webinars:
- Social Security 101: The 3 Rules to Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough to Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
Darren Wurz is a fee-based financial advisor and co-owner of Wurz Financial Services, where he operates the Northern Kentucky/Cincinnati office. He is a CERTIFIED FINANCIAL PLANNER™ and has a master’s degree in financial planning from Golden Gate University. Darren specializes in serving the unique financial planning needs of attorneys and law firm owners. He is the host of The Lawyer Millionaire Podcast and author of The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence, published by the American Bar Association.
Darren is a member of the American Bar Association and the Financial Planning Association. He is also active in his local community as a member of the Northern Kentucky Bar Association, Cincinnati Bar Association, Covington Business Council, and Northern Kentucky Chamber of Commerce. To learn more about Darren, connect with him on LinkedIn.