The smell of that first $5 bill. The quarters you put in the basket at Sunday school. An allowance we awaited anxiously. Can you recall your first money memory? Money, like romance and work, is one of those themes that follows our whole lives and has real emotional weight to it.
Teaching kids about money is especially complex – you aren’t just passing on a few bucks to go to the movies, but an array of attitudes, values and assumptions regardless of whether you mean to. Your kids watch, in a way not even they are aware of, how you interact with finance and how you model it for them.
Let’s look at childhood, college years and leaving a legacy – three major intersections between parenting and financial planning that many of us will have to cross at some point.
Here’s where those first money memories live. Most of us can not only recall those memories, but we can trace some of our financial behavior back to them. If your parents were vocal savers, putting away money and invoking it as the reason you didn’t do certain activities, your saving or spending habits can usually be traced back to that modeled behavior or a reaction to it.
Kids are largely concrete thinkers who can see that A equals B and B equals C, but would have trouble seeing that A equals C in that equation. In these years, delayed gratification doesn’t make too much sense, as seen in the “marshmallow test” – an unsurprising number of kids want that one sweet treat right away rather than waiting for two.
My 5-year-old has her own piggy bank and her own bank account. She’s starting to understand the piggy bank concept – saving sometimes for large purchases. But she doesn’t understand the bank account, no matter how many times I tell her the concept is the same. If she can’t touch the money, then it’s essentially not real.
These are important years to let kids make purchases and budget. Putting out that allowance when they’re a little older will give them the tangible disappointment of blowing it all on candy and the sophisticated thrill of saving for the better toy.
Thinking about Thinking
As kids enter their teen years, they develop the ability to think about thinking. At this point, they can begin to test out a hypothetical instead of turning to trial and error. These can be prime years to work on a savings/checking account, as your kids no longer have to physically handle money to understand its impact.
Here’s a few statistics:
- Tuition at a four-year public institution has gone up over 200% in the last 30 years.
- In 2036, a four-year degree from a public school will cost nearly $180,000, a private school will be over $300,000.
- College tuition rises almost eight times faster than wages.
Gone are the days of putting your lawn-mowing money in a jar labeled “college” and leaving for school as a universal coming-of-age experience. The expense of higher education has a huge percentage of Americans in debt and can drastically outweigh the earning power it prepares you for.
One important strategy for college savings is the 529 Plan. This account is essentially a 401(k) for college – tax-advantaged and tax-free for qualified expenses. One important recommendation to think about is who owns the 529 and how it impacts your FASFA. Student owned has a larger impact than parents. Other relatives – grandma and grandpa, rich uncle Larry – don’t impact the FASFA until funds are withdrawn.
Try to see college as part of an overall financial plan. If your student wants to pursue a teaching degree and the $50,000-per-year job to follow, the state college might be a better choice than the private (and expensive) family alma mater. A faith-based institution could cost substantially more than a state school, which will usually offer several on-campus ministry options for spiritual formation, anyway.
College isn’t a given anymore, and even some of the highest-earning families have to engage the costs creatively.
You hope your kids learn their financial values in childhood and earn a lucrative education in the college years, then become earners in their own right. The next time you and your child intersect in a substantial financial sense will be your own estate planning. Even in this late chapter, you can still model wealth wisdom for your adult children.
Awareness is still important, even in the anxious and emotionally confusing prospect of planning your estate. It’s part of life, because it involves the end of said life, that we often put off talking about it. But there are important details that can have you losing large amounts of money to taxes, probate courts and other avoidable complications.
The current gift tax exclusion stands at $11.58 million per individual and $23.16 million per couple. This is a very real concern for high net worth families and also business owners who are working through succession planning. You want to pass on legacy to your kids, not taxes.
In the past, you could set up what was affectionately known as a “stretch” IRA, breaking up an inherited account into small distributions over several years to lessen the tax hit. Now, per the SECURE Act effective in January 2020, 10 years is the maximum to drain an inherited account.
Every Parent’s Hope
Childhood, college, passing on your wealth – these major transitions will be at the core of your family’s financial plan. After all, every parent’s hope is that their children will go further than they did.
Wealth is a tool that can help them get there, but it takes planning, rigorous honesty and time. Our financial advisors have helped thousands of families through the journey of financial planning and parenting. Get in touch for a complimentary initial consultation and let’s start planning your journey today.
Before investing in a 529 Plan, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.