(Forbes) A good friend recently told me that he is concerned about the way his son, a newly minted college grad, handles his finances. Though he’s lucky enough to have a promising entry-level job and no student loan debt, he’s squandering this opportunity to get ahead by spending money almost as soon as it hits his bank account. My friend said that these poor financial habits were learned early on, when his son never saved a cent of his allowance.
That’s hardly unusual. Many parents – even those who have successful careers and earn high salaries – may fail to engage their children about the importance of being financially disciplined. And that’s a problem because poor financial habits often are ingrained during adolescence and, thus, become hard to shake in adulthood.
While it’s never too early to introduce basic concepts, I believe the best time to engage young people can be during their early high school years. That’s typically when they start to show an interest in high-priced items but just before they get summer or part-time jobs to help pay for them.
Don’t hesitate to get your financial advisor involved. In fact, as a long-time veteran of the financial services industry, I can tell you that you should probably question them if they don’t offer to do this proactively. For them, it’s not only the right thing to do; it’s also an opportunity to build on the existing relationship they have with you and establish an early inroad with an heir, which is always important for asset retention.
To be sure, high-school-aged children are not likely to get excited over the prospect of meeting with their parent’s financial advisor, but as long as the discussion is short, light and free of harsh criticisms, they will likely appreciate that it’s for their benefit. Here are four areas in which I believe these discussions can be beneficial:
Saving And Budgeting
Most kids can understand that the more money they retain, the more money they will have to one day spend on things they want. This makes saving and budgeting the ideal topic for their first session with your financial advisor.
A simple way for kids to begin saving is to set aside a certain amount — say, 10% — of their allowance or income from a part-time job in a checking account with no minimum requirements. In my experience, some providers allow kids as young as 13 to have accounts and give parents control over withdrawals.
For budgeting, teens can use any number of mobile apps to track their expenses over the course of each month. Ask your advisor to go over them with your children and perhaps help install them on their phone or tablet. When parents and kids take the time to review those monthly spending logs, it could quickly become clear that some purchases were unnecessary.
Debt Management
Some teens already have access to credit cards. Others soon will. Either way, I feel it’s important for every young person to understand the consequences of loading up on debt too early, allowing interest to rack up on unpaid balances and absorbing late fees. The message from the advisor should be: Use credit sparingly, pay off balances in full and never miss a payment.
This can lay the groundwork for maintaining a good credit score, which can allow them to eventually acquire favorable loan terms on a mortgage, car or other types of personal loans. Another consideration is that it’s generally very difficult to be a young entrepreneur with a poor FICO score because starting a business requires capital. So, anyone hoping to be the next Steve Jobs or Jeff Bezos can probably kiss those dreams goodbye if they aren’t a good credit risk.
Retirement Accounts
A later session could introduce the possibility of establishing a retirement account. Teenagers can have Roth IRAs, according to a 2014 Money article, so long as they have earned money in the tax year it’s opened and an adult co-signs the account as a custodian. In my opinion, it would not make any sense for a teenager to have a traditional IRA because a child would not make enough money to benefit from the upfront tax benefit. This opens the door for the advisor to show just how much money can accumulate in retirement accounts over the course of several decades. Plus, once the child has a Roth IRA, the advisor can talk about stocks, bonds and taxes.
An Insurance-Like Strategy
These sessions can deliver multiple benefits for your children, who could lead healthier financial lives and make wiser decisions as a result. But parents may benefit as well, and the sessions could serve as a form of insurance for them. Due to reports of high medical costs and the potential that future retirees could receive lower federal entitlements, as describedby The New York Times (paywall), even successful professionals should not ignore the possibility of one day having to look to their adult children for financial help.
While the advisor’s job, at its core, is to protect against that scenario, I believe you should also make sure you have financially responsible children who can provide an extra layer of security if necessary.
