Jump Start Your Children’s Wealth Building

wealth buildingLast year I wrote about helping teenage children fund their IRAs in order to boost their long term retirement savings.  The more years for compounding the better we are when it comes to retirement savings. There are of course different goals that young adults have when they enter the real world, and retirement savings is typically not at the top of the list.  Paying off student loan debt, buying a decent car, and saving for the down payment on a house are all higher priorities.  Sam at the Financial Samurai wrote about how we shouldn’t worry because there will be a massive transfer of generational wealth over the next several decades.  I think concentrating on how to MOST effectively distribute that wealth is an interesting topic.

Knowledge And Planning

First and foremost, in order to help your children be successful financially you have to help yourself first.  Transferring wealth to children doesn’t help anyone if you rob from your retirement in order to help them launch into the world.  Making sure all your ducks are in a row is the first step.  Even without any actual money to give, knowledge can be worth far more than federal reserve notes.  A basic financial education will set your kids up for success.   Covering topics such as making a budget, maximizing the delta, planning and paying for college, buying a first home, and planning for retirement will go a long way in helping to guide them.

I come across people all the time who have two simple barriers in their way keeping them from getting a job and thus becoming self supporting and getting ahead; transportation and communication.  With transportation it is either lack of a car, lack of money to get the car legal, and/or lack of a drivers licence.  Going through drivers ed can be expensive, but without a licence and a vehicle getting and keeping a job becomes very difficult, especially in areas that are not served by a widespread reliable public transportation system.  Make becoming mobile a life goal for young teenagers, have them work over time to build up savings specifically for this goal and consider offering to pay half if you can’t afford to buy them a car or pay for drivers ed. Communication is the easier part of this.  A cheap prepaid phone will at least allow for receiving calls and messages from potential employers.

The second issue that stops people from getting a good head start is lack of an emergency fund.  Your brain works differently and you make better decisions when you have a bit of a cash cushion.  Teaching your children and encouraging requiring them to establish an emergency fund will give them a  major springboard in life.  If they leave your home with  $3-$5K in their pocket they can weather a temporary job loss, a car breakdown, an increase in insurance costs or other emergency without being screwed.

Instill a good work ethic. The more they get used to working while at home, the better off they will be. If possible take them to work, take them to your side hustle, set them up to shadow other friends and family members on their jobs to see what people to do make money and the vast array of options there is in our society.Have them take Mike Rowe’s SWEAT Pleadge.

The last major non-cash preparation for the real world you can give your children is to take action to not be a young parent.  Having kids before establishing a career and building some wealth keeps millions of people in this country from getting a foothold on finances.  No, children shouldn’t be used as an excuse for poor financial behavior, but having kids too young greatly reduces the ability to build wealth in the key wealth building years.

Okay, So What About Cash Help?

If you have the means to help your children financially, then I would say the rest are prudent steps to furthering their ability to get established in life.  I think giving money to children is only a good idea if they are grateful for it, understand the work and sacrifices that had to take place to build the wealth they are receiving, and are acting responsible in life. I think matching contributions to encourage savings on their part is an excellent way of providing help, without rendering them dependent.

1. Pay for college expenses.  Of course take steps to ensure you are getting the best value possible for your money by maximizing scholarships, financial aid, tax credits, CLEP exams, and community college.

2. Give them an emergency fund; track how they manage it.

3. Help with purchasing a decent used car, (second car)

4. Help with an apartment lease first month/last month/security deposit and/or home down payment.

5. Contribute to their retirement account once they start working. Take, $50, $100, or even $500 a month and contribute it to their retirement accounts once they start working, possibly as a matching contribution to their efforts. If they are a young entrepreneur this could be VERY early in their life.  Earnings  from babysitting and lawn mowing at age 12 can kick off wealth building long before they can start working for someone else in a “real” job.

6. Help them with launching costs for their children.

 

Action Steps:

  • Discuss and Teach Finances.
  • Have them save up and help them become mobile.
  • Make a detailed plan for education.
  • Make a detailed plan for retirement.
  • Have them set up and start funding a Roth IRA, even at $25 a week.

In what ways do you think it makes sense for well off parents/grandparents to help out their teen and adult children?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John is the author of the book For My Children's Children: A Practical Guide For Building Generational Wealth.

Leave a Reply

Your email address will not be published. Required fields are marked *