Kids Need help too

Kids are living in the entitlement generation, the shadow of their Baby Boomer Parents. For some reason after World War II, children developed an attitude of having it all and having it now.  This has gotten many people of both generations in a load of debt. One of the biggest things that I’ve seen as a coach at Prosper is that a lack of financial knowledge is multi generational. The inability to manage money is transferred down to the kids, then their kids, and so on. Many people see personal finance as a boring, painful thing to contemplate. This being the case, it is no wonder that children end up not knowing how to manage money.
The question then is what can be done to circumvent the perpetuation of a dearth of financial intelligence?
Here are a few ideas to get started:
The challenge is to develop a series of cumulative steps that will make the world of personal finance visible, credible, and appealing to young people. What follows is a collection of various steps to consider for creating financial coming-of-age traditions tailored to your family’s values and circumstances. They are offered as a way to jumpstart brainstorming. Specific traditions will obviously vary for each family according to family values and family wealth.
To some, this first idea may be considered dangerous or contradictory. It is however critical to teach children about the proper use of credit. Once a child turns 16, consider getting a credit card in the child’s name, with the parent as the guarantor. At age 18, consider a low-limit card for which the child is responsible, in addition to a card in the parents’ name to use in case of emergency and/or for purchases that in your family are paid for by the parent. Help your older college student to order a credit report from one of the national reporting agencies (www.equifax.com, www.experian.com, or www.transunion.com).Throughout the college years, and especially early on, keep the communication about credit card use ongoing.
In families where inheritances in the form of trust funds are part of the picture, consider working with your attorney to develop a series of steps designed to draw your child gradually into trust management while educating them about the world of personal finance. For example, trust documents can specify that young adult heirs become co-trustees with limited responsibility and authority before assuming full responsibility at a later age.
At age 18 a child can open his or her own checking and savings account. Consider making a parent/child visit to the bank to open these accounts an honored coming-of-age ritual in your family. During the visit with the bank officer, review how to track deposits and withdrawals, arrange for an ATM debit card and a first PIN number. Review safe ATM machine habits. Help your child think through what percentage of earned income, and of gifted monies, will go to checking versus to savings. Use this opportunity to promote the notion that “in our family”—or at least in smart circles—people save 10% to 20% of every dollar they earn, starting with the first dollar.
Once a child has earned income—income reported on a W2 form at year-end—consider opening a Roth IRA account. When the child turns 18, she can directly open an IRA account herself. Explain that Roth IRAs are one of the most powerful personal financial savings vehicles available, and a potentially important source of long-term wealth. Contributions are made with aftertax dollars, but then grow tax-sheltered and (with reasonable planning and under current law) also escape taxation at withdrawal.
To fund a Roth IRA for a young adult, it is necessary for that young adult to have earned income. However, there is no IRS prohibition preventing parents or grandparents from funding all or a part of the contribution, if they choose to do so. Some families offer a parental (or grandparental) matching contribution, some families fund the entire contribution, while other families make up the difference between an agreed upon child’s contribution and the IRS maximum allowed contribution—or between an agreed upon child’s contribution and the minimum amount required by the IRA company to open an IRA.
Children grow up with an intuitive notion of their family’s standard of living—but no dollar amount to associate with that standard of living unless parents share that information with them. At some point it becomes appropriate and helpful for parents to share information about their income and wealth with their children, a process that is perhaps the most profound financial coming-of-age ritual of all. There are few higher honors for a child than when a parent trusts the child with family’s personal financial information. For this reason, coming to know one’s own family net worth and income level, as well as the financial history and philosophy of one’s parents, can be a fruitfully maturing experience in itself.