Think back to your education in personal finance. Did you learn about money management at home? At school? Through trial and error?
“When I talk to people about their own financial educations, I hear a lot about regret—regret that they didn’t learn the fundamentals sooner,” says Carrie Schwab-Pomerantz, CFP®, president of Charles Schwab Foundation and senior vice president of Schwab Community Services at Charles Schwab & Co., Inc. “Indeed, entering the workforce with a solid understanding of money management can give you a real leg up in the long run.”
Unfortunately, many young people aren’t getting an education in the fundamentals of financial independence, such as budgeting, investing, and saving. According to the Council for Economic Education, just 21 states require high school students to take a class in personal finance.1
“It’s really up to each of us to ensure our kids are prepared to thrive as adults,” says Chris Kawashima, CFP®, and a senior research analyst at the Schwab Center for Financial Research. “Otherwise, it could take them years to figure it out, all while saving too little and spending too much—both of which are huge barriers to financial security.”
Here, Carrie and Chris share their top tips for instilling healthy money habits at three crucial early stages of life.
When they’re little
- Introduce the value of money
An allowance is a good first step—especially if you tie at least part of it to chores that teach responsibility and work ethic. Earning an allowance introduces kids to the value of money and making choices for themselves. “In fact,” Carrie says, “kids often find they make different choices with their own money than they would with someone else’s.”
- Emphasize saving
At some point, your kids are going to want things that exceed their allowance. Encouraging them to save for those items teaches them the concepts of delayed gratification and trade-offs. Make saving a part of their routine and have them set aside a small portion—say, 10%—of every dollar they receive, including allowances and gifts.
- Introduce them to investing
Once your kids have saved up some money, you can consider opening a custodial brokerage account for them. “Let them choose a few stocks to invest in, then set up regular meetings to review their performance,” Chris says. “You might be surprised by how engaged kids can be when it comes to investing in a company they know and like.” Keep in mind there may be unique tax considerations for these types of accounts, so it’s generally best to work with an advisor to ensure they would be appropriate for your situation.
When they’re teenagers
- Encourage a summer job
“We know from our research that young people who have jobs are more likely to be better savers in the long run,” Carrie says. So, make sure your child is saving a portion of every paycheck—and maybe even require them to help out with other expenses, as well. “It’s perfectly reasonable to expect kids to pay for their own gasoline or trips to the movies,” she says.
- Introduce them to credit
As teenagers become more independent and start driving themselves around, Carrie says it can be helpful to make them authorized users on one of your credit cards. “From a practical perspective, having a credit card to deal with emergencies like flat tires is always a smart idea,” she says. More to the point, it can help them learn to spend within their means—assuming you require them to pay back every dollar they charge—and begin to understand how the credit they establish today can affect big purchases in the future.
Chris emphasizes that it’s equally important to explain the basics, such as how credit cards differ from debit cards. And it’s essential to explain the dangers of high-interest debt and revolving credit. “The more they know about debt, the more likely they are to manage it responsibly,” he says. This is also a good opportunity to introduce the concept of credit scores, so they can see that their creditworthiness is being graded, just like a test at school.
- Consider a Roth IRA
Once your kids have earned income, they can start contributing to an individual retirement account (IRA). Chris suggests a Roth IRA for most young savers. “Roths are funded with after-tax dollars, but withdrawals in retirement are entirely tax-free,” he says. “By funding these accounts early—when their income, and thus their tax rate, is still very low—kids can benefit from decades of compound growth and tax-free income in retirement.”
When they’re young adults
- Help them set a budget
Once your kids accept their first jobs after college, help them draw up budgets based on their salaries and estimated expenses. “When you’ve never lived on your own, it’s easy to underestimate common expenses, such as groceries and utilities,” Carrie says.
It’s also a good idea to review your children’s employer benefits with them to ensure they’re taking full advantage of all available options, especially any matching contributions to employer-sponsored retirement accounts, such as 401(k)s. “It’s important for them to understand the value of those matching contributions,” Carrie says. “It’s like free money!”
- Encourage them to stay invested
While you’re on the subject of investing, it’s a great time to introduce basic principles like diversification, risk tolerance, time horizon, and compound interest. “Understanding these concepts can help them select a healthy mix of investments—and help them stay invested when markets turn rocky,” Chris says.
As for the investments themselves, there are literally thousands of low-cost index funds to choose from, which can be overwhelming to a novice—so when in doubt, choosing a product that allocates and invests their money for them might be the best approach.
One such option is a target-date fund, whose asset allocation mix becomes more conservative as the target date approaches. Another option would be to consider a robo-advisor (like Schwab Intelligent Portfolios®), which builds, monitors, and rebalances a diversified portfolio of exchange-traded funds on an investor’s behalf.
- Let them know they’re not alone
You want your kids to be fully independent adults, but there will be times when you might need to step in to help them from veering off course. After all, making poor financial decisions can be an expensive learning experience.
And if they have a question you can’t answer, it’s likely someone else can. Carrie says this is the main reason she always recommends introducing kids to their family’s financial professionals. “You want them to get in the habit of asking for help if they need it, and not just from you,” she says. “Even the professionals get help—I know I do.”
1Survey of the States 2020, 02/2020.