An Ounce of Planning
Ernie Neve, CPA
April 21, 2020
Last week, I was sharing some insights about estate planning and some key takeaways anyone can use to ensure that their estate in not caught shorthanded or overtaxed when the time comes to settle it.
I’ve continued to follow that thread this week, because for many families, there is not only the so-called “interfamily loan” possibilities, but also, some really nice strategies that parents can create early in a child’s life that have little – or nothing – to do with estate planning. As I shared last week, with many of us sidelined in our traditional schedules, this is an ideal time to get a lot of necessary “work” done in our private financial lives, and as an entrepreneur and business owner, you know every hour counts!
There are four really useful ways to incorporate some financial planning into any child’s life with the long view of creating wealth over many decades.
· Open a Roth IRA. This is the first major stop in any long view of wealth creation. I certainly understand how statistics can be manipulated, but if that account has $5,000 contributed annually from the time they begin to work (around age 16), they can amass in excess of $2 million by the time they retire. Nearly all of it will be driven by the interest, not the principal, and it is largely tax-free.
· Teaching them about credit and building the credit history. This one requires a bit of management, of course. Parents must be mindful of how they develop that child’s credit history and there needs to be strict “money rules” about usage rates to ensure their credit score increases, rather than decreases, but allowing your MATURE teenager to become an authorized user of one or more of your credit cards can truly help them to get a head start on the path to good credit – and give parents peace of mind that they have helped to create smarter young adults.
· Manage Student Debt. Let’s face it, there are a lot of hot buttons in this discussion, but first and foremost, it might simply be best to open a frank dialogue about what the child’s goals are and to explore if a college education is even the right path for them to pursue. A close friend in the East whose son wants to be a chef encouraged his son to not pursue simply a culinary degree, but to balance that with a two-year Associate’s to ensure the young man grasped the “business” side of the restaurant business, while not tying up untold thousands of dollars in a college degree that the boy would not effectively use. It’s no different, really, for anyone, and today, more than ever, it’s critical for kids to understand that college debt doesn’t have to be bad, but they need to realistically analyze the costs and benefits of their chosen degree.
· Talk about money. The harsh truth is parents are far more likely to talk about sexual education with their kids than they are to discuss financial literacy with them, After all, if they grew up listening to talk like “money doesn’t grow on trees” or a scarcity mindset, then they will internalize that conversation and not be able to comfortably navigate finances and questions about how to deal with money. This can be a real challenge, especially if you aren’t comfortable about money! No matter what, though, anyone can learn and the simple fact is, you can challenge yourself to make that conversation more comfortable while teaching your kids about it. Don’t be scared and – as always – feel free to reach out to us for advice.
For a lot of us, we’re having to realize that our kids are learning far differently than we did and with our collective and newfound access to time together, it’s a great time to recognize that “learning” doesn’t always take place in a classroom or on a computer.
We’ve all learned a lot about the people we love and live with these last few weeks, and to our team, this has become an ideal time to really help them to all get traction in their own goals.
Stay safe and we’ll chat soon!