1. Help your child open a checking account
Only 24 percent of the parents surveyed by T. Rowe Price said their children had checking accounts. However, it’s important to give kids experience managing checking accounts while they’re still at home, when you can offer guidance.
Engel said he didn’t have a checking account until he went to college. As a result, he headed off to school without experience writing checks, using an ATM or making sure there was enough money in his account. His daughter, on the other hand, has a checking account and is using her bank’s mobile app to keep tabs on it. She’s gaining hands-on experience by managing her own money.
2. Open a Roth IRA
Another great way to set your children up for future financial success is to open a Roth IRA for them at a bank or investment firm. As long as they have earned income from a job — such as babysitting, mowing lawns or working in retail — they can start saving for retirement in a Roth. It’s important to note that contributions can’t exceed a child’s earnings, and the maximum yearly contribution is $5,500.
Kimberly Foss, author of “Wealthy by Design” and founder and president of Empyrion Wealth Management, opened a Roth IRA for her son when he was just 5. At the time, he was earning money doing simple tasks in her office, such as shredding paper. He’s now 11 and has about $60,000 in the account.
Foss said opening a Roth IRA can help your child establish good saving habits and also give him or her a substantial nest egg as a result of compounding interest. Along with offering tax-free retirement withdrawals, a Roth can be tapped for college costs or a down payment on a house.
3. Teach kids responsible credit card use
Giving your children credit cards can be tricky. It’s important that they start building good credit, which will help them when they’re adults and need to borrow money to buy a car or house. However, you don’t want to introduce credit before they’re able to handle it responsibly — especially because you’ll have to cosign on a card or make children authorized users of your card, if they’re younger than 21.
So, it’s important to start slow when it comes to giving credit to kids, Engel said. You can accomplish this goal by taking out a secured credit card, which has a credit limit based on the amount that’s deposited with the card issuer.
Additionally, parents should explain to their kids that credit cards should be thought of as cash, and users should only charge what they can afford to pay off each month, Tabacinic said. Show them how to review their monthly statements to see how they’re spending their money — and how much interest is being charged if the balance isn’t paid. You should also explain the cost of making late payments.
4. Take advantage of a 529 Plan
More than two-thirds of college students graduate with student loan debt, according to The Institute for College Access & Success. Parents who want to ease some of the burden for their kids can open college savings accounts when their children are young, so they won’t have to rely so heavily on debt.
Engel recommends that parents save college funds in a 529 plan, which is similar to a retirement account in that money can be invested in mutual funds. However, with a 529, tax-free withdrawals are allowed for qualified educational expenses. Some states even offer tax deductions or credits for contributing to a 529 plan.
However, parents shouldn’t let saving for their retirement take a backseat to financing their children’s college educations, Engel said. After all, there are no loans for retirement.
5. Have your kid contribute to college costs
According to the T. Rowe Price survey, more than 60% of kids expect their parents to pay for college. Even if you can afford to pay for your child’s college education, or fully fund a 529 plan, that doesn’t mean you should, Engel said.
For starters, you shouldn’t save enough in a 529 to cover the full cost of college. After all, you might not need that money if your child gets a scholarship or opts not to attend school. Earnings on non-qualified withdrawals are taxed as ordinary income and hit with a 10% withdrawal penalty. Further, kids should take on some of the responsibility of paying for college themselves.
“There’s a lot of value in letting kids have some skin in the game,” Engel said. If children are covering some of their educational costs, they will take college more seriously. “None of us appreciate what we’re given as much as what we’ve earned,” Engel said.
credit – businessinsider