Aloha Kālā Capital Fam!
I'm excited to share some major updates with you. As some of you may know, I'm about to embark on an extraordinary journey into parenthood, as my wife and I are expecting our first daughter at the end of this month. This incredible milestone coupled with my passion for financial planning has me thinking (even more than normal!) about the importance of financial education and the vital role it plays in our lives.
One thing that's become glaringly clear throughout my career as a financial planner is the pandemic of people suffering in silence when it comes to their financial situation. The lack of financial education, money conversation, and good fiscal habits established early have led to unquantifiable damage, emotional turmoil, and not to be dramatic, but even death. At Kālā Capital, we firmly believe that the foundation for financial success starts with education, and that education starts at home.
With the arrival of our daughter on the horizon, I've been contemplating the various ways my wife and I can set her up for financial success from the very beginning. Some of these methods I will share can be done behind the scenes, and on a need-to-know basis, while others are experiences that we could share together as a family. In this blog, I'd like to explore eight money-savvy ideas (not recommendations, but things for you to think about and look into if they sound interesting) that could empower children with financial skills, knowledge, and resources to set them on the path to financial independence and a bright financial future. Let's dive in!
1. Putting Them on a Credit Card as an Authorized User
One interesting idea to consider is adding your child as an authorized user on your credit card. It's not about giving them a card for shopping sprees but rather a way to start building their credit history early. It's like giving them a financial head start, which could help them in the future. Solid credit history can help them boost their credit score and secure favorable terms and conditions for loans, potentially saving them thousands of dollars in interest when they decide to buy a home or a car.
2. Establishing Various Types of Trusts
While trusts might sound complex, they can be valuable tools for securing your family's financial future. Think of them as secret vaults where you can protect and manage your assets while ensuring they're used in ways that align with your family's values and goals. Trusts could also offer some tax benefits, which can be a financial win-win. For example, setting up an irrevocable trust can help reduce estate taxes, preserving more of your wealth for your children and grandchildren.
However, it's essential to remember that setting up trusts isn't a DIY project. It involves legal complexities, so working with an attorney is crucial to ensure everything is set up correctly.
3. Creating Custodial Accounts
Another idea to consider is setting up custodial accounts like UTMA, Custodial Roth IRA, or educational savings accounts for your child. These accounts offer some attractive tax advantages when used appropriately. For example, a Roth IRA can grow tax-free, and withdrawals in retirement are also tax-free, providing your child with a tax-efficient way to save for the long term. However, it's vital to understand that custodial accounts come with contribution limits and specific rules, so it's essential to understand them thoroughly before diving in. In this example, a child must have earned income for a parent to contribute to a custodial Roth IRA. Keep on reading for an idea on how to help your child earn income.
4. Inspiring and Encouraging Entrepreneurship
Why not inspire your child's entrepreneurial spirit? Encourage them to explore the world of business, whether it's setting up an online store, flipping items like furniture, shoes, or these days something digital. These experiences can teach them valuable lessons about creating value and managing money. They can be introduced to concepts like gross income, expenses, taxes and profit in a way that is fun and tailored to their interests. Entrepreneurship fosters creativity, critical thinking, and a strong work ethic.
5. Talking About Your Financial Situation and Investment Strategy
Parenting advice I keep getting is that children will not listen to what you say, but mirror what you do. Consider having meaningful money conversations with your kids (when they are old enough to understand). Share your family's financial situation, investment strategies, and how they align with your goals and values. It's like inviting them into the financial decision-making process and letting them see the bigger financial picture. This transparency can help children gain valuable insights into financial planning and decision-making early.
6. Help Them Create Their Savings and Investment Plans
Sitting down with your children to help them set their financial goals sounds like it could be a fun and educational experience to me. Helping them map out their dreams, both big and small, and then creating a plan to reach those goals (just like I do with my clients) can be empowering. Who doesn't want to be in the driver's seat of their financial future? By establishing these plans based on their wishes, you could be teaching them the importance of thinking long-term and delaying gratification.
7. Employ Them in a Family Business
Another intriguing idea is to give your child a job within a family business. Maybe this means you need to start a side hustle with them and learn a thing or two yourself, you know, lead by example. Not only can this help bring in more income for the family, and increase tax efficiency, but it's also an opportunity for your child to learn hands-on money making, keeping and investing skills. It's an early introduction to the world of entrepreneurship, value creation and problem solving, where they can apply their creativity and hard work in a practical setting.
8. Teaching Savings as a Habit
The lack of financial education is a major problem, but it’s not the biggest problem I see. What I see hurting most people is a lack of discipline, execution, and urgency. To achieve financial independence we all have to live on less than we earn. There is no way around it. I believe instilling the importance of money management in our children from a young age will give them a massive advantage as an adult. For example, you could teach them how to balance between saving, spending, and giving. If they earn $100, you could withhold $30 for taxes (you can use this money to fund a custodial account), have them saving $20, giving away $10, and spend the rest. It's helping them lay the foundation for a lifetime of financial responsibility, where saving becomes a natural and integral part of their financial journey.
Parents and future parents, we have the opportunity to equip our children with the skills and knowledge to navigate the financial world successfully. These eight money-savvy ideas offer a mix of approaches, from behind-the-scenes financial strategies to hands-on experiences with our children. I hope you can pull out a few nuggets to help spark curiosity and financial awareness in your child on their path toward financial independence.
Ethan Ho - Your Financial Advocate and Soon to be Dad (still feels weird to say)
Remember, it's just as important to walk the walk (set a good example) as it is to talk the talk the talk.