Teaching Financial Independence Starts at First Steps

As parents, we teach our children so many things. We are there when they start crawling and next to them when they’re learning how to drive. Teaching personal finance to children follows a similar path. I firmly believe that by starting small and establishing good financial habits early, you’re setting a foundation for a healthy financial future. By teaching kids the value of smart money management we equip them with skills that should benefit them for a lifetime.

An Evolving, Ongoing Conversation

One question I often get  from clients is, “When I should begin introducing the topic of money to my children?” My answer is, “Early!”

When kids start getting an allowance, birthday money, or their first afterschool job, that can open a conversation about money management: What do they want to spend right away and how much to save for something bigger down the road? As your kids get older and the numbers get bigger, that conversation can include saving for college or their first car, or how much to give to charity.

The transitions from high school to college, and then from college into the workforce are also excellent times to “level up” your conversations about money. For example, you can prepare your college freshman for the slew of credit card offers they’re about to receive. Talk to them about the myth of free money, how easy it is to overspend and the difference between the minimum payment and the balance due.

Start With “Why?”

As any classroom teacher will tell you, “Why?” is a big question for young people. So, a natural place to start is talking about why financial independence is important.

For me as a parent, I want to know that my sons are secure, stable and set for financial success. For them, financial independence is about being able to do what they want to do: travel, go to school, eat out, buy a nice car, live where they want to live, whatever is important to them personally.

Share why financial independence is important to you and encourage your kids to consider what it means to them. Once you understand the “Why,” then you can begin to dive into the “How.”

Savings: An Indicator of Financial Success

Savings is one of the biggest indicators of the likelihood of financial success. Here are four simple tips to get your child’s savings off on the right foot:

1. Start Early: The earlier they start saving, the longer their money has to grow. Introduce the concept of compound interest to your child and explain how they can earn interest on interest.
2. Save Consistently: If your child creates the habit of saving a certain percentage of everything they make, their savings will grow as their income grows. Plus, when they save automatically, like with a paycheck deduction, they’ll never miss the money.
3. Set goals: Talk about the different types of savings: savings for emergencies (like car repairs), short-term goals (like a new computer) and long-term goals (college or a house down payment). Then, discuss how much savings your child wants to allocate toward each goal.
4. Shop Around: When setting up a savings account for you child, take the time to look at all the options. Different financial institutions have different fees, minimum account balances and interest rates. Your local bank or credit union typically only offers very low interest rates on savings accounts. Instead, you may want to help your son or daughter set up an online high yield savings account, which offers an interest rate around 4 to 5%.

Saving vs. Investing

When the time is right, you can explain the difference between saving in a bank account and investing in a retirement fund or brokerage account. In general, investing is for long-term goals, like retirement, while savings accounts are for more immediate needs. Investment accounts will fluctuate with markets, but offer better long-term results than a savings account at a bank or credit union.

Your child’s first “real job” after college is a pivotal point for cementing savings habits and kickstarting retirement investments. Encourage them to set aside a minimum of 10% of everything they make into a retirement account. If your child allocates a portion of their paycheck to retirement savings from day one, they will never miss that money, and it will grow exponentially until they retire. By starting young, they give themselves many more years to grow their retirement savings.

In general, the best way for young professionals to save is in a Roth IRA or Roth 401(k). While there is no tax deduction up front, Roth accounts will grow tax-free over their lifetime. For a young person just starting their career, that can mean 40 years of earnings that may never be taxed, a powerful way to save. As always, talk to your Advisor to decide what’s best for your family.

Debt: The good, The Bad and The Gray

“Debt” has gotten a bad rap, but it’s important for young adults to understand that there are different types of debt. Not all debt is “bad.”

Take a home mortgage loan for example. Everyone needs somewhere to live, and home ownership can be an excellent investment. The majority of young people can’t afford to pay cash for a home, so they save for a down payment and get a mortgage loan to cover the rest. The mortgage is attached to the home, which is an asset that typically appreciates. That makes mortgages an example of “good” debt in many cases.

On the other hand, having a wallet full of high-interest credit cards is an example of bad debt if you use them to spend more than you earn, and only make the minimum payment each month.

There are also some kinds of debt that fall into a gray area: Vehicle loans are one example. Transportation is a necessity, but cars are a depreciating asset, which means they lose, instead of gain, value over time. So, when considering a car loan, encourage your child to think about the payment, as well as the cost of insurance, gas and maintenance. Make sure it works within their overall budget.

The Silver Bullet: Balancing Saving and Spending

When it comes to achieving financial independence, there is no “Silver Bullet.” In general, having good savings habits and controlling spending is the key to financial security. That’s where a budget, or a spending plan, comes in.

Although you can certainly start earlier, the transition from high school to college is a prime time to work with your child on a budget. Some important things to discuss include the difference between “needs,” like paying tuition or buying groceries, and “wants,” like a daily coffee from the coffee shop or the latest iPhone.

You can then help your child estimate how much money they have coming in from a weekly or monthly allowance and/or a job. Then, determine how much is required to cover their “needs,” how much they want to save for emergencies, short- and long-term goals, and what’s left over for “wants.”

Introduction to Insurance

When your child buys their first car, moves into their first place, or gets their first job with benefits are ideal times to introduce the topic of insurance. Common types of insurance to consider include:

• Auto insurance: A must-have for all vehicle owners.
• Renter’s insurance: Highly recommended and sometimes required for renters; note that most home insurance policies do not extend to rentals, so check with your insurance agent.
• Health insurance: Most young adults can remain on their parents’ plan until age 26, but it’s worth evaluating an employer-sponsored health plan if it’s offered in your child’s benefits package.
• Additional insurance: A benefits package may also include options such as disability, long-term care and life insurance. Encourage your child to discuss the options with you or your TCI Advisor.

As with savings accounts, it pays to shop around to make sure you are getting the best insurance coverage at the best rates.

Estate Planning Essentials

While most young adults don’t need complex estate plans, there are a couple key things to discuss and consider with your child. A basic estate plan should include a will and/or financial and health care powers of attorney. These documents provide instructions on who is the best person(s) to make decisions for your adult child if they become incapacitated and who will inherit their assets if they pass away.

One of the simplest things your child can do is ensure they name beneficiaries on all of their checking, savings and investment accounts, especially as those accounts begin to grow.

We’re Here to Help

Just like learning to crawl and drive a car, learning good money habits takes time. The ultimate goal is to help our kids attain complete financial independence, and that is a gradual process. This isn’t a conversation that needs to happen all at once, so don’t get overwhelmed. As parents, your role is to provide stepping stones on the journey. Give your kids a safe space to make mistakes when the stakes are low and offer them more autonomy over time. My sons don’t always follow my advice, but I like to think our conversations helped them develop some good habits.

Remember, your TCI team is here to help! We are here for the entire family, for every step along the financial journey. Whether it’s starting the savings and investing conversation with a teenager or helping a recent college graduate pick benefits at their first job, each of us at TCI loves encouraging and empowering young adults on their journey to financial independence!