How to Help Build a Better Financial Future for Your Kids
The old idea of getting good grades, doing well on tests, and getting into a good college guaranteeing you a great life with financial wealth and stability is dead. Many of us were raised to study hard, get that degree and repeatedly told this was THE key to success. Once we follow this path, we are hit with the harsh realization that most of the information you learned and regurgitated in these high stress exams is never used.
You go to a great college hoping it will get you ahead, but millions of others have great degrees as well. You find in most cases companies do not care where your degree came from, they just want to know if you are going or went, and what you studied. I had teammates who went 2 years, were still in school or went to a community college, and my expensive degree at top school did not matter. You work your butt off to get into these colleges, and unless fortunate with family help to pay for it (I put myself through college), you then end up in debt over 100k to get a job you had the skills do after high school! Then you are faced with corporate jobs or food and beverage/service work unless you have a specialized degree, and you work like a dog to pay off the debt you racked up to get your degree. You work so hard, did all the right things, but here you are grinding it out feeling like a robot with very little control over your day-to-day life.
What was all that studying and debt for…
It starts with changing your mindset and the standard script you share with your kids staring at a young age. The internet has afforded us the opportunity learn limitless things and access information at our fingertips at any time for free. It has never been easier to research what you know and pass the knowledge along to your kids. What is clearer than ever, is that working the standard corporate job is not the only path and not a guarantee for a thriving financial future.
After working in the real estate industry with investors and property owners, it is clear they are making different choices than the average person. Real estate and stocks are a must have goal. When you save money in a bank, you are losing money. Why…because the banking system is one of the biggest scams of modern society. Banks use our money to lend to others and make money from it by charging interest, while you make zero. Does that sound like a win? Something I wish I learned sooner that putting all your money in a bank is not saving money but losing it- with the value not increasing and as a result of inflation.
#1 Teach your kids about compound interest- Put $100 in bank account, get $100 back years later, but with inflation, that $100 does not buy what it used to. Put $100 in a stock investment which averages a 10% annual increase in value, and 20 years later that $100 is $672 dollars just from sitting in an account. Imagine if you added more to that figure every month, the increase would be life changing for your child (or yourself if you do it for your retirement). Many are scared off by it thinking it takes too much work, lots of money or lots of skill to get started. Putting money in a bank seems “safer”, but the simple truth is that any small amount will work, and doing nothing is the only unsafe decision. If you began with 10k at birth, with 10% return calculated, by age 40 your child would have $452,000 thousand dollars!
#2 Teach your kids about stocks- Set up a custodial account in their name and instead of putting money in a bank savings account, use the account to purchase stocks. When I was a kid, I recall watching family members watch the news with stock bars running across the screens with all these letter and numbers. I had no idea what it meant, but I knew it was important. I remember asking for stocks as a gift for many years and was ignored. They were not long term thinkers or taking me seriously. I got scared off from it from lack of knowledge and shortage of cash. When I did make money, I kept it in a bank. Now as a mother, I can do for my son what was not done for me- invest in his future so he has the ability to make choices not just based on survival or the fear of not having his next meal. It is easy to show your kids through a few simple steps how to purchase a stock, and how stocks will grow over time. If you go to Charles Schwab, you can set up an account for your child. In that account, you can go online without having to deal with annoying phone customer service lines, search the abbreviated name for a company you are interested in, and then see the price for 1 stock. Once it appears, the options are easy to follow regarding buying the stock, the price of it, how many shares and when to buy it.
#3 Teach your kids about real estate investment vs. renting- One of the biggest wastes of money is renting a single property that you live in. The simple fact is ownership provides you with a tool to create a 2nd source of income outside of your job. When you own a property, you can choose to live in it as the property increases in value over time. It could increase 8% or more per year. You could rent it out for more than the mortgage and increase your monthly income with the extra rental income coming in (sometimes you can rent, not live there and rent out the property for higher price then a rental payment). You can also rent it out on Airbnb for even more money depending on the location and condition of the property. If your child has money saved, they can take those funds and use it to put a down payment on a property vs college, and start building their financial future at a much younger age than many adults who are not able to buy a property until their 30’s.
#4 Teach your kids about specialized trades and degrees- Going to college just to go, while getting a degree in History, could lead to severe debt with no actionable skills. Many are taught to look down on jobs such as plumbing, but that is a high demand, high paying skill. Starting your own business as a plumber may not seem glamourous on paper, but it will be pretty damn amazing when making 200k a year and having control of your own schedule. There is a shortage of trade skills such as plumbing, electrical work, and more which is a great opportunity to provide a hard skill that is highly sought after. There is more than one path to success and developing a clear set of skills vs the “just go get that degree” will lead to a better future.
#5 Teach your kids about credit scores and debt- Financial literacy should be part of our core curriculum in high school, but we send kids out into the world with credit card offers and very little idea of how to manage their money. You go to buy something that you need like a car, then they ask for more information to check your credit, but your kid won’t have credit to get a loan for a car. They go to open a credit card and could get denied, or if they get one, they look at it like “free money” to go buy things. Some companies do not care as they hope to rope in a spender who they can charge 20% interest rates to on top of what they bought- what a scam!
Why is credit so important…it gives a person the ability to make a large purchase for an item such as a car, they must have in order to work for example. It can affect getting a job since many companies check credit information. It can affect being able to rent an apartment since credit reports are checked. Credit also affects getting a loan for a large expense which is better than blowing through your entire savings to purchase leaving a person with nothing to invest (investments lead to an increase in wealth as a result of compound interest).
The first step is to explain what credit scores are and how they are calculated- amount of accounts open, the credit limit used, the amount of debt, the length of each account history, and on time vs late payments. The second step is to help build your child’s credit by adding them as an authorized user to one of your credit cards (not all will allow this, and you can Google the rules for each). This will give them a credit history making it easier for them to get a loan if needed. The third step, when they are older, is to get them a secured credit card for them to use in order to build credit (the bills are paid in full every month).
#6 Teach your kids about inflation and taxes- One of the biggest shocks is getting that first paycheck and seeing just how much comes out in taxes. Here is the breakdown:
6.2% Social security
1.65% Medicare
Totaling 7.65% and it automatically comes out of a paycheck. (Note- the business owner/employer must pay the same and match the rate at 7.65%).
Federal income tax- estimate 24% (varies)
State income tax – estimate 5.75% (varies)
You work your butt off and before you see a dime, boom a huge chunk is gone. Granted you can get some of your federal income tax back depending on your filing status but estimate 30% is gone for the state of Georgia. If you factor in health insurance and 401k savings, your paycheck will be even lower. There is a huge difference between gross and net pay which merits having a discussion with your child to ensure they understand how this will affect them.
Once the taxes are out, you take that money to buy something, and you are hit again with taxes including food in most cases. Now you have another 8.9% gone (Georgia). You buy real estate and pay property taxes that never go away. Taxes are a vital piece of financial literacy that most kids are not aware of until they find themselves struggling to cover their own expenses once living on their won.
Inflation means that the same items could increase 5% per year despite remaining the exact same product. The gallon of milk could be $3 this year or $4 next year, while a person’s income has not changed, which means they have to spend more money (getting no additional value), while they are left with less money left over.
Inflation with stagnant wages is one of the biggest issues facing us right now. We need more and more money just to cover the basic essentials such as housing, transportation, healthcare, food, personal care, household items, electronics/tech, and childcare. With corporate greed skyrocketing as they invest in monopolies and CEO bonuses while keeping stagnant wages, financial awareness is more important than ever. It is an important discussion to have as it will help your child be aware of the importance of having a budget. This could mean the difference between success and financial ruin as an adult. Don’t delay in having money discussions with your kids.
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