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Building Financial Muscle
By Lee Matthew / Illustration by Robin McClannahan
WE ALL KNOW that the earlier in life you manage to get in shape, the easier it is to stay that way. Good fitness habits, for example, established early on, can help you stay healthy throughout your life.
To help your kids establish a firm base for lifetime financial fitness, consider the following:
1. TALK WITH YOUR CHILDREN ABOUT INCOME AND EXPENSES.
Many kids have no idea how much it costs to live and how much they can expect to earn in different kinds of jobs. Many kids, in fact, do not even understand that they will be responsible for their own financial future.
Talk with your children about the expenses you have each month, and encourage them to find out about salaries in the fields that interest them. Then, talk with them about what it takes to provide enough financial independence for a
retirement that may last 30 years or longer.
In today's business world, the trend is toward self-directed retirement plans, in which each individual is responsible for building and managing the nest egg that must pay for expenses in retirement. So it's important to understand that getting started on a plan from the very first day on the job should be given high priority, even when retirement seems a very long way down the road.
2. HAVE YOUR CHILD OPEN HIS OR HER OWN BANK ACCOUNT.
This is a great introduction to the whole concept of banking and money flows. It's also a wonderful way to encourage him or her not to spend every monetary gift or every dollar earned.
3. OPEN AN INVESTMENT ACCOUNT IN YOUR CHILD'S NAME.
For as little as $25 a month, you can establish an investment account for your child in a good diversified mutual fund. In New Mexico, you or another adult will need to act as custodian until your child reaches 21, when the account can be reregistered in his or her name. But, we hope, long before that day arrives, your child will "learn by doing," participating with you in making investment decisions for this account.
Note: In these custodial accounts, earnings are reported under the custodian's social security number until the child reaches 14 years of age; then the child's social security number is used.
4. HELP YOUR KIDS ESTABLISH IRAS.
If your children have earned income during the year, they may contribute to an IRA up to the amount they earned or $2,000, whichever is less. In the world of investing, time can be a powerful ally -- the younger your child is when he or she establishes an IRA, the greater the potential for many years of tax-deferred earnings (there are no guarantees, of course, and an investor's shares, when redeemed, may be worth more or less than the original cost).
So help them get going on a long-term plan -- if your kids are short on cash, you could even consider making them a gift of money equivalent to their IRA contribution. Keep in mind, though, that withdrawals prior to age 591/2 may be subject to a 10-percent tax penalty, in addition to ordinary income taxes.
For children under 21 years of age, either traditional or Roth IRAs must be established as custodial accounts. Generally, the adult who serves as custodian must send a letter of indemnification to the investment company along with the account application; your financial adviser should be able to help you draw up this letter.
5. ESTABLISH A SCHOOL-YEAR BUDGET.
This may work best for children who go away to high school or college, but try it even if they stay home. Have them list their expenses, assign priorities and determine how these expenses will be met.
Will they have an allowance? Work part time? Work summers? Have a discussion about what's fair for parents to cover and what's fair for kids to pay for, once they start working. This is a wonderful opportunity for kids to learn about cash flows, and to get a better sense of the consequences of different decisions.
Lee Matthew is a financial planner in Albuquerque.
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Tuesday, October 5, 1999
The habit of staying in shape financially can never start too soon
It's no different when it comes to financial fitness. Here, solid understanding and good habits may make the difference between a rosy financial future and a bleak one. When kids know about the basics of money and investing, and start out with good habits, such as spending less than they earn and saving the difference, they're several steps ahead on the road to financial fitness as adults.
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