Sunday, March 25, 2012

2 Ways to Improve Your Kids' Financial IQ

In a recent meeting of Chief Executive Boards International, a member raised the question, "Anybody got any ideas on helping your kids understand and believe in saving and investing?"    When the conversation was over, another member said, "That was worth the whole meeting."   

Two great ideas came out of that meeting that I thought you could use.   If you act fast (before your kids file their 2011 tax returns), you can even use these retroactively for 2011.   
  1. Roth IRA Income Matching -- Most useful for kids before they're professionally employed, this strategy is simple.   For every dollar earned (as reported on their tax return), offer to match, up to dollar-for-dollar, their earnings in a Roth IRA account (up to the Roth maximum, currently $5,000).   Easy to set up with any big-name fiduciary (T Rowe Price, Fidelity, Vanguard, Schwab, etc.)  
    This applies to baby sitting, paper routes, busboy jobs, etc.   What happens over their high school and college years is that a fund of $20,000 - $30,000 accrues.   When you finally pull out the statement, explain how it added up and how it's become serious money.

    Suggestion:   It might be advantageous to keep those statements to yourself for several years -- just intercept them from the household mail.   True, if a kid older than 18 wants to, he can raid the account and spend the money.   If that happens, you then know you have a completely different problem and you can go to work on that.  
    Variation on this idea -- One of our members said he had been doing this since his kids were little, paying them $5,000 out of the company (to create the required earned income) and then funding the Roths for the full $5,000, restoring the FICA haircut that comes along with this strategy.   I'm not so much of a fan of this one since there's no incentive -- perhaps useful up to, say, age 16, and then revert to "I'll match what you actually earn."
  2. Roth IRA Contribution Matching -- Once in a professional job, they probably have a qualified plan, like a 401(k), available.   Yet few young professionals take advantage of these.   So, offer to match, up to dollar-for-dollar, their own 401(k) contributions in a Roth IRA (up to the Roth maximum, currently $5,000).  Yes, they can contribute to both a 401(k) and a Roth, assuming they're below the income phase-out limits.    In fact, even if they're over those limits, there's a strategy by which you could still to this:    Click here for details   
    If they don't have a qualified plan at work, then they can contribute to either or both a conventional IRA or Roth IRA.    The catch is that the maximum allowable annual contribution is $5,000, including your match, between both accounts.   So, you could match $2,500 dollar-for-dollar or, say, $4,000 at 25 cents on the dollar. 
Both of these ideas hinge on an important principle -- They've gotta do something for themselves before you'll do something for them.  Keep that idea in mind, whether dealing with kids or employees. 

The core idea here is to create a "snowball" that's big enough to interest them in making investment choices, and also to demonstrate that simple, regular monthly investments (and living far enough below your income to make them) are the keys to long-term financial independence. 

As I mentioned, one member said these two ideas were "worth the whole meeting,"    I hope you find that to be the case, as well, and that you'll move quickly to decide whether you want to do this retroactively for 2011.   Of course, you have plenty of time to start such a program in 2012.    

If you have some strategies for building financial IQ and discipline with your kids, please click "Comments" below and share them with others.   

To forward this to a friend, Click Here

Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

No comments:

Post a Comment

Comments to CEBI Blog articles are moderated to ensure member privacy and control spam. All comments except those deemed inappropriate should post within 24 hours.