There is the proverbial story of how to talk to your kids about money. They see your family home and their comfortable room - maybe decked out with gadgets - and they feel safe knowing you’ve provided for them. But do they know how you managed to do that? Depending on how old your children are, you’ve likely never had “the money talk” with them, even if they’re well into adulthood. According to a 2015 study done by Pew Research Center*, the number of millennials moving back home has rapidly increased in recent years, yet in the same time frame the labor market has improved for young adults. These shifts in the economic landscape leave parents with a great opportunity to chat about money with their children. The following will outline how to have that talk.
Start With Their Goals
It’s important to talk to your children about their goals so they can develop a realistic approach for how to achieve them. One common goal with young adults is to one day own a home. But are your children aware that the cost of a home, in terms as a percentage of income, is higher today than ever before?** Being able to make a down payment will be no doubt be a challenge for your young adult children. They might feel hopeless, thinking they have no chance of buying a home. They might feel clueless, not knowing how to get there. Maybe they assume that you will take care of it--just as you always have. While a little support is fine and not uncommon, as a parent, you still want them to earn what they have.
As a parent, you know now that starting investing young pays off in the long run. Encourage your kids to start saving and investing on a consistent basis. Work with them, and a financial advisor, to figure out what it is going to take to turn your children’s’ goals into reality.
Explain Your Triumphs and Mistakes
In the same way your children may be inspired by your successes, they can learn from your failures as well. Maybe you took too much risk and put too much money into technology companies during the dot com bubble. Perhaps there was a time you left too much money in cash and let your emotions hold back your investments. Maybe you bought Apple when you saw the iPhone for the first time, or held your Blue Chip dividend paying companies for decades.
Whatever the case is, both positive and negative, share these stories with your son or daughter. Hopefully this will teach them to make rational, informed investment decisions and help them understand the impact the market can have on their lives.
Tell Them About Roth IRAs
It’s possible that the Roth IRA wasn’t available when you were younger, but it’s an excellent tool for young investors to take advantage of. Any money put into a Roth IRA will grow completely tax free. Account holders cannot touch the growth of this account--without penalty--until they reach the age of 59 1/2. Be sure to consult a financial advisor to see whether or not your child meets the qualifications to open a Roth IRA. Once they have their account established, remind your child to set up a systematic contribution to save a little bit each month, even if it’s just $50. Setting these contributions up to occur automatically can give your child peace of mind knowing their money is working for them in the background, and you won’t have to worry about reminding them to contribute to their account.
If you were fortunate enough to have learned the basics of finance early in your own life and plan to leave money to your children, these lessons become even more important. It’s human nature for parents to want their kids to be successful, and financial security is a huge part of that. It should be your goal to help them understand how important it is to plan for the future, now. Help your children refine their goals, tell them stories of your successes and failures, and explain the importance of generating tax free income which will help ensure they make educated decisions, today and long after you’re gone.
At the end of the day, it’s important to remember that there is a fine line between providing basic education and handholding. One way to give your children a push towards financial independence and stability is to recommend that they sit down with a financial advisor, who can be there every step of the way of their financial journey.
By Ben Dunbar
Investment Advisor Representative
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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