Even though I am not a father yet, I am someone who likes to plan ahead. I do this in order to be prepared to make the most of my future. This bright future will hopefully include children whom I can help guide on the right path in all aspects including finances.
Unfortunately, in today’s world parents are still relying on the school systems to provide financial literacy. This is a major problem as most curriculums in schools and even college fail to provide this information. So, it is up to the parents to take on this task and ensure a bright future for their children. In theory this is how things should be however, according to marketwatch.com only 57% of Americans are financially literate. This means that parents teaching this information isn’t feasible for all households. Although, these are the general statistics and my hope is that you’re apart of the majority. If you are reading this article and you are not, then take the time to learn!
With the abundant access to information there is no reason why you should not be financially literate. This education is the determinant of many things. This includes the amount of taxes you pay, the amount of money you have saved, and the retirement nest egg you create. Having control over your finances will be able to improve your living situation and your families future.
If you’re already financially literate then congrats on being apart of the majority. Now with this knowledge you can use it to not only improve your own way of life, but also improve your children’s future. So, I will share with you 3 ways you can help improve your children’s financial future. There are many different strategies out there and these 3 aren’t necessarily the best. However, I think they are essential foundational steps that all parents should take.
1. Add your kids as authorized users on your credit card. (If you are responsible with credit).
An authorized user is an additional cardholder added to someone else’s credit card account. This individual is granted permission to use the credit card for purchases, but the primary cardholder (account owner) remains responsible for the account and its payments. Being an authorized user can be beneficial for building or improving credit, as the account’s activity is often reported to credit bureaus under the authorized user’s name. However, it’s important to note that the primary cardholder’s credit habits will impact the authorized user’s credit score.
So, how does this help your kids? Well it’s simple it allows them to begin establishing credit much sooner than most. This is a huge advantage in the credit game as one of the biggest factors is the age of credit history. I personally didn’t start building credit until I was 20 years old which is fairly common for most. However, different credit issuers allow authorized users significantly younger than that. This will allow your kids to have years of established credit history by the time they are ready to buy their first car or house. Disclaimer, this only works if you are responsible with your credit. If you are not then you can do a lot more harm then good. Only add them to a card that gets paid in full and does not carry a balance.
Here are some age requirements for different issuers:
- American Express: 13 years old
- Bank of America: No minimum age requirement
- Barclays: 13 years old
- Capital One: No minimum age requirement
- Chase: No minimum age requirement
- Citi: No minimum age requirement
- Discover: 15 years old
- U.S. Bank: 16 years old
- Wells Fargo: No minimum age requirements
2. Open a custodial account.
A custodial brokerage account is a type of investment account that allows an adult (the custodian) to manage financial assets on behalf of a minor (the beneficiary). The account is designed to provide a way for adults to save or invest for a child’s future, make financial gifts to a child, or provide for a child’s financial needs during their minority. Custodial brokerage accounts can be opened at banks or financial institutions. This is a very powerful tool that can give your children exposure to the stock market and take advantage of the on average 10% before inflation return of the S&P 500.
Key characteristics of custodial brokerage accounts:
- Managed by the custodian: The adult opening the account (custodian) is responsible for managing the account’s assets until the minor reaches the age of majority in their state (typically 18 or 21 years old).
- Irrevocable: Contributions to the account are considered irrevocable gifts, meaning they cannot be withdrawn or reversed once made.
- Beneficiary control: When the minor reaches the age of majority, they gain full control of the account and its assets.
- No contribution limits: There is no limit on how much can be contributed to the account in a given year.
- Annual gift tax limit: However, contributions exceeding the annual gift tax limit (currently $18,000 per person) may be subject to federal gift tax.
- Flexibility: Funds in the account can be used at any time and for any purpose as long as it benefits the minor, including educational expenses, medical expenses, basic life needs, and other essential needs.
- Types: There are two main types of custodial brokerage accounts: UGMAs (Uniform Gifts to Minors Act) and UTMAs (Uniform Transfers to Minors Act). UGMA accounts are available in all 50 states, while UTMA accounts are not available in South Carolina and Vermont.
3. Ensure your kids read “Rich Dad Poor Dad” by Robert Kiyosaki & buy and play the Cash Flow board game.
If you do not own these products then you should not only for your kids but for yourself. The book is a must read as it has opened the eyes of many now successful individuals. “Rich Dad Poor Dad” is an easy read but it is jam packed with valuable information. It is very useful in helping people gain a level of financial literacy.
The first two suggestions were tools to help improve your children’s financial future. However, this is a useful resource that helps to teach your kids about finances. Without this knowledge the process of building your kids credit and exposing them to the stock market is useless. Once they’re on their own they still would lack the knowledge to keep and eventually grow their money.
The other suggested resource is Robert Kiyosaki’s board game “Cash Flow” which is a game I own and play often. The game is designed to teach players about investing, financial management, and wealth-building strategies in a fun and interactive way. This game can help reinforce what they’ve learned already through reading the book. This will help them to truly understand how money works and how they can become successful financially.
I would recommend these resources in the age range of 14-18 years old. During this time they would be able to absorb these teachings and begin figuring out how to apply it in their lives.
I hope you found the information provided in this article helpful. As parents your kids are your pride and joy. You want what’s best for them and for them to live good fulfilling lives. Well be the parent that provides their kids with the full picture. You don’t want the “real world” to be a shock, so start early and give them the head start you wish you had.