By Dr. Jim Dahle, WCI FounderAdulting is hard. We all want our kids to succeed personally, professionally, and financially. A parent's biggest dilemma is, “How can we best set them up without ruining them?” Here are five suggestions that are highly likely to help with little danger of hurting them. The first three should be done before they turn 18 and the last two as they turn 18.
#1 Open a Roth IRA
As soon as kids start earning money, you should open a Roth IRA for them. Whether it's their money going into the Roth IRA or your money (technically it's always their money, but you know what I mean), it's good to start saving early. At the very latest, however, you need to open a Roth IRA BEFORE they turn 18. Before age 18, it's a custodial IRA that you can open on their behalf. Once they turn 18, THEY must do the opening. As parents of young adults know, that's a MUCH bigger ask. So, do it while you still can. Then, all you have to do when they turn 18 is get them their own login and password.
More information here:
Economic Outpatient Care and the Aspiring Millionaire Next Door
How I Teach My Kids About Money
#2 Set Up Banking
About 5% of Americans and 1.4 billion adults in the world are unbanked. Don't let your kid be one of them. Having the ability to access banking services is an underrated but critically important step toward building wealth. Go open a checking account (and maybe a savings account, too). Get them an ATM card and checkbook. Show them how to write checks, take money out of an ATM, make deposits, check a balance, and balance a checkbook. That's Banking 101.
If you want to put them through the Banking 201 class, help them link their checking account to an online high-yield savings account and their investment provider (Roth IRA +/- a brokerage account) and set up direct deposit with their employer.
#3 Financial Literacy
While many states now require a high school financial literacy course, there are still plenty that don't. Plus, the curriculum in many of them isn't particularly rigorous. And not all kids take it seriously. Financial literacy is like sex education. It's critically important life knowledge and the schools can help, but it's still the parent's responsibility. If your kids get to 18 and don't know anything about budgeting, insurance, debt management, or investing, you've failed—and they're going to pay the consequences. I hope your experience is similar to mine when my kids came home from their financial literacy class and said they were the only ones in the class who knew what a Roth IRA was—much less had one.
#4 Discuss the Transition
As your child turns 18 and/or graduates from high school, it's time to have the talk. Too many parents fail to have the talk and then are surprised a decade later when their child is still living in the basement and still financially dependent on them. Six areas to include in your discussion include:
- Financial support: Will you be giving them money? Under what circumstances?
- Living arrangements: Can they live with you? Until when? Under what conditions? Will they have to contribute anything?
- Cell phone plan: How long will they be on the family cell phone plan? Will they have to pay anything toward it? How will that be done?
- Cars and car insurance: Will you let them drive your cars? Under what circumstances and for how long? Will you be giving them a car, selling them a car, or just having them drive your car? Consider getting your name off the title of any cars they're driving for asset protection purposes. Will they be staying on your auto insurance policy? For how long? What if anything will they contribute toward it?
- Tax preparation: Who will be preparing their tax returns and who will pay for that? When will they start taking care of it?
- Health insurance: Federal law now requires that insurance companies allow you to keep your kids on your health insurance policy until they turn 26. There are really no restrictions on this. They can stay on even if they:
- Get married
- Have a baby (although the baby won't be on the plan)
- Move away
- Go to school or quit school
- Become financially independent from you
- Become eligible to enroll in an employer's plan
However, just because they CAN stay on your plan doesn't mean they should. Depending on your plan, having a dependent on there may be much more expensive than just getting their own plan via the PPACA exchange, their employer, or Medicaid. Besides which plan they'll be on, you'll also have to sort out who will pay for it.
More information here:
#5 Put Them on Your Oldest Credit Card
You should also consider adding your 18-year-old to your oldest credit card. This will give them an instant years-long credit history. That credit history and its accompanying score will be useful as they rent a home, purchase utilities, gain employment, and secure credit. Instead of getting a “starter” or “student” credit card with a credit limit so low they will have to make a payment on it after a night out (and can't even put a single airline ticket on it), they'll get a real one with better rewards and a higher credit limit.
You've presumably already taught them that credit cards aren't for credit, they're for convenience. Plus, you don't have to actually give them a physical credit card or even tell them the number on the card. It's just another way to give them a leg up in their financial life.
If you're like most parents, you'll still struggle with determining how much you can help your kids without taking away their drive to work hard and be frugal, but these five suggestions are as close to no-brainers as you'll find.
What do you think? What did you do (or plan to do) for your kids? Any regrets? Anything you'd do differently?
We did pay for a lot when our kids were in their early twenties. But now, they’re both mid-to-late twenties and they pay all their bills. As my father did for me, my husband and I still pick up the tab when we eat out with them. I give cash gifts at Christmas and on their birthdays, so they can buy whatever they want. My main task now is to teach them to save consistently in their Roth IRAs, Roth 401ks, and HSAs. This is still a work in progress.
I’m not sure young adults today need to know how to write a check or balance a checkbook. Neither of my kids has a checkbook, and I myself am trying not to write checks. We all find other ways to pay. I balanced my checkbook to the penny for about thirty years. Around 2010, I realized that I had real time data whenever I logged into my checking account. This is what we didn’t have in the pre-internet era. We had to balance our checkbook when the monthly statement arrived to know whether our records agreed with the bank’s.
I’m not sure young adults today need to know how to write a check or balance a checkbook. Neither of my kids has a checkbook, and I myself am trying not to write checks. We all find other ways to pay. I balanced my checkbook to the penny for about thirty years. Around 2010, I realized that I had real time data whenever I logged into my checking account. This is what we didn’t have in the pre-internet era. We had to balance our checkbook when the monthly statement arrived to know whether our records agreed with the bank’s.
Come to think of it….I don’t know if I’ve ever “balanced a checkbook” and I only write one or two checks a year too. So maybe that part isn’t so important after all.
“Go open a checking account.”
Banks require a balance of at least $5k, $7k, etc to maintain “free” banking services. What alternatives are there for a young person with no discretionary balance?
You might try a local credit union. Ours doesn’t charge fees on my kids’ accounts. I’m pretty sure our local bank doesn’t either, but they don’t have accounts there so I’m not 100% sure. I know they don’t charge fees on my checking accounts but there may be a $1,000 minimum at the local bank now that I think about it.
There are no fee checking accounts available. I have a checking account with Wells Fargo that does not charge me for my account. You simply have to qualify for ONE of their criteria, which includes:
-having $500 or more in qualifying deposits
-Be an account owner age 17-24
-maintain $500 minimum daily balance
-etc.. (there are a few more criteria)
Any particular reason you’re comfortable with any money at an institution that has shown so much disregard for its clients like Wells Fargo? They’re on a very short list of companies I would never do business with. Just an example but there are many:
https://www.justice.gov/archives/opa/pr/wells-fargo-agrees-pay-3-billion-resolve-criminal-and-civil-investigations-sales-practices
I’ve had a Wells Fargo checking/savings account for years and I know about the issues you bring up. I live in a small town and they have a local branch which is convenient, but do you think it’s worth changing banks due to their history? I basically just use it for direct deposits and monthly expenses and only have ~$20-30k there at any one time.
Admittedly I’m probably just being lazy and the inertia of having had them for years has led me to just stick with it.
Changing banks is indeed a pain….but I’ve “fired” a company for less.
There are PLENTY of banks where that isn’t true, and it’s been that way for years. SoFi and Ally are two big names, just go there.
Via email:
Dr. Dahle,
Glad you’re getting better. I enjoy all of your stuff. Two additional thoughts about helping your kids.
1 – If the parent has a high deductible insurance plan and is responsible for the kids, help them
start their own HSA. I saw an article about this in the WSJ about two years ago. I made a copy of it and sent
my two youngest kids into Schwab with 2 checks. The Schwab Denver office had never
heard of this but they checked with their NY office and immediately opened up these HSA accounts.
My kids thought I was Warren Buffet.
2 – A small but big bit of advice: get the kids to invest every month on the same day. For us, on the fifteenth
of the money, I text them and remind them to invest, “whether it’s five bucks or five hundred.” We
laughed about it in the beginning, but the lesson stuck.
Again, really glad you’re on the mend.
And my response:
1. I agree as discussed here: https://www.whitecoatinvestor.com/hsa-loophole-adult-child-family-contribution/
2. I really like that suggestion. Just a little nudge.
great advice for adding kids as authorized uses to your credit cards. I have done this with my kids, and they are only 7 and 9 years old but they now have a huge credit history to help get lower interest rates and borrow money in the future. got to make sure they are responsible with debt along with this though!
You might be a little early with that move….
1. I would double check this. It is very common for the age of account for an authorized user to begin when they are added, not just go be 20 years from day 1
2. Regardless – lenders aren’t stupid. There are hundreds of attributes they purchase from the bureaus to feed their underwriting – you’d better believe there is a flag for “age of account > age”. Whether they care is a different matter, but don’t kid yourself into thinking they aren’t aware
Maybe for a mortgage someone does a deep dive, but for a typical credit card, I doubt it. They just want you to meet the screening credit score number. And this technique certainly gives you that. My daughter now has a 794 2 months after doing this trick.
Ha! Yeah, probably…