As parents, we want to be able to provide the world for our kids. In the beginning, we just want them to succeed in the little things – eating, sleeping through the night, walking, etc. But as our kids get older, we do our best to teach them right from wrong, to instill confidence, and to help them discover who they are.
Regardless of the careers our kids eventually pursue, we hope they can attain financial security and have the confidence to make informed decisions with their money. Just as we can’t guarantee our own success, we can’t do so for our kids. But by taking a few actions with your own financial planning, you can help your kids start off on the right foot financially.
Review Your Financial Situation:
If you don’t take care of your financial situation, you may cause your children to start their lives taking care of you, which may cause them financial and emotional stress. Take time to focus on your finances. Start by reviewing your life insurance policy. Do you have enough coverage to prevent your family from going into debt if you were to unexpectedly pass away? If your family has grown in the past few years, it may be time to make an update.
Now may also be a time to review your estate plan — or implement one if you don’t already have a strategy. Without a will, your estate faces probate, which can be a costly and timely process. Even if you already have a will, review it at least once every two or three years to make sure it’s accurate and up-to-date.
Lastly, don’t neglect your retirement planning because you’re saving for your child’s college education. Many parents who choose to save more of their money for retirement realize that they are on their own, and they don’t believe Social Security will be enough to cover their cost of living in their retirement years. While these parents may put some money into their children’s college savings accounts from time to time, they realize that in order to take care of their family, they need to take care of themselves first. After all, if they don’t have enough saved up for retirement, the support they may need could ultimately fall on their children’s shoulders.
Help Them Save for Retirement
Just about any financial professional will tell you: it’s never too early to start saving for retirement. A lot of times people say they don’t have enough money to make it worth contributing to an IRA or 401(k). But $25 per month is still $25 more than $0.
As you approach retirement, you’re probably seeing firsthand how different the retirement landscape is compared to your parents’ generation. Even Millennials worry about Social Security and whether it’ll be around in 50 years. You can help your kids start saving for retirement with something as simple as a Roth IRA.
Imagine this: Your daughter, a 21-year-old college student, is working part-time and earning an income. Why not help her by instructing her to open up a Roth IRA to jump start retirement? To make it more attractive to her, start that account with $1,000 and have her contribute $100 per month. If she were to continue contributing $100 every month, she would have $360,000 when she turns 65 years old (assuming a 7% annual return). If that doesn’t excite her, tell her that if she waited to start saving until she was 26 years old under the same assumptions (e.g. $1000 upfront, $100 per month at 7%), she would have $100,000 less at age 65.
Compound interest can be a young person’s greatest ally. Help your kids understand the importance of retirement planning at an early age.
Help Them Fund a Life Insurance Policy
Life Insurance can play an important role in someone’s financial strategies at any age. Parents may choose to fund a life insurance policy on their children to take advantage of a lower premium. While parents don’t anticipate their children dying at a young age, generally speaking, policies are less expensive the earlier you purchase them because you have longevity and your health on your side.
Life insurance can also help protect your kid’s financial portfolio when they get older. With a permanent policy, the cash value built up in the life insurance can be used to subsidize the costs that they would pay when they get a larger policy or they can even be used to fund long-term care insurance later in life. And, should the unfortunate happen, life insurance can offer some additional confidence and financial security.
Recruit Professional Help
It can be helpful to introduce your kids to your financial advisor or, if you aren’t working with one, to find one who is willing to work with your entire family. An advisor can help your kids start investing and learn the importance of saving for retirement as early as possible. The more financial knowledge your kids have, the better equipped they’ll be to get on the right financial foot once they graduate college and enter the adult world.