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Plan Well, Retire Well

Saving and investing your money
smiley with money

10 MORE Rules Money Savvy Kids Should Know by Age 18


I have mentioned before that I did not do a very good job of teaching my kids how to handle money. That is in part because my parents did not do a good job teaching me. Finances were something that were not talked about with children (who should be seen and not heard!). Many do not believe that family finances should be talked about and in some cases that is true. But, there are plenty of things you CAN and SHOULD teach your children without revealing how much money the family earns or how in debt they are.

Here are 10 money rules that kids should know and practice before they turn 18. The rules and the activities that follow are from moneyasyougrow.org a site endorsed the President's Advisory Council on Financial Capacity and by the American Library Association as a great website for kids.

For younger kids, see my earlier post 10 Rules Money Savvy Kids know by the Age of 10.

10-13 year old

The sooner you save, the faster your money can grow from compound interest

Compound interest is when you earn interest on both the money you save and the interest you earn.

Show your child the following: If he sets aside $100 every year starting at age 14, he'd have about $23,000 at age 65. However, if he begins saving at age 35 he'd have about $7,000 at age 65. Assume the account earns 5% every year.

To compute compound interest, use the calculators at investor.gov.

Discuss how much your child can save. What will he have to give up? Is it worth it?

Using a credit card is like taking out a loan; if you don't pay your bill in full every month, you'll be charged interest and owe more than you originally spent.

Discuss why you should not use a credit card to buy something that you can't afford to pay for with cash.

Look at credit card offers online with your child, and compare the interest rates.

Using the Credit Card Repayment Calculator at federalreserve.gov, see how long it could take to repay a $1,000 credit card debt by making the minimum monthly payments.

Discuss how a credit card can be useful for making purchases online, or as a convenience.

14-18 year old

When comparing colleges, be sure to consider how much each school would cost you.

Point out that college grads earn almost twice as much as people who did not go to college.

Discuss how much you can contribute to your child's college tuition and expenses each year.

Compare college costs, graduation rates, loan default rates, average monthly loan payments, and employment prospects by using the "College Scorecard" at collegecost.ed.gov/scorecard.

See what schools cost by finding the "net price calculator" on their websites; know that most families don't pay the tuition sticker price.

Use the Consumer Financial Protection Bureau's Paying for College tool to compare financial aid offers at consumerfinance.gov.

To estimate your financial aid, use the FAFSA4caster tool at fafsa.ed.gov.

Go to studentaid.ed.gov to research additional loans, scholarships, and grants,
and use the calculators to estimate monthly loan payments.

You should avoid using credit cards to buy things you can't afford to pay for with cash.

With your child, fill out the Income and Expenses budgeting worksheet available at mymoney.gov.

Discuss why having a savings and spending plan in place could help him avoid using credit cards.

Drive home this rule: When you use a credit card,baim to pay it back in full each month; otherwise, you could be charged high interest.

Using the Credit Card Repayment Calculator at federalreserve.gov, see how long it could take to repay a $1,000 credit card debt by making the minimum monthly payments.

Your first paycheck may seem smaller than expected since money is taken out for taxes.

Discuss the difference between gross pay (before taxes are taken out) and net pay
(the amount you take home).

Explain that the W-4 form, which you fill out when starting a job, determines the amount of taxes taken out of a paycheck.

Explain that tax brackets vary depending on how much you earn. (In 2012, single people who earn $8,700 or less per year pay a tax rate of 10%, for example, and those who earn between $8,700 and $35,350 pay 15%.)

Discuss what taxes pay for, including schools, road maintenance, and medical help for the elderly.

Once your child has a steady job, help him set up an automatic savings program so that at least 10% of earnings goes directly into his savings account.

18+ and before they leave home….

A great place to save and invest money you earn is in a Roth IRA.

If your child has a job, encourage him to open a Roth IRA (Individual Retirement Account).

Explain that a Roth IRA allows the interest you earn to grow tax-free for life.

Experiment with different amounts of savings and interest rates. Use a compound interest calculator at investor.gov.

Use the "Rule of 72" to estimate how many years it would take to double your money.
If you invest in an account that earns 8% interest, you'll double your money in
nine years (72 divided by 8 is 9).

Explain to your child that once he starts a job, he may be offered a similar account at work called a 401(k). Some employers even provide matching contributions.

You should use a credit card only if you can pay off the money owed in full each month.

Understand that when a parent cosigns, any late payments you make will also affect their
credit history.

Paying bills late can hurt your credit history and affect your chances of getting a job.

Get free credit reports once a year at annualcreditreport.com.

Look for a credit card with a low interest rate and no annual fee.

There may be an emergency expense that you can't pay off immediately and need to charge. That's why it's important not to charge everyday items.

To learn more about the credit card rules, go to federalreserve.gov.

You need health insurance.

Comparison shop for insurance like you would for any other product.

If your parents have health insurance, see if you
can stay on their policy—with some exceptions,
you are entitled to, by law, until you turn 26.

Get more information about the health insurance
available to you at healthcare.gov.

Purchase renter's insurance if you lease
an apartment, and auto insurance if you own,
lease, or rent a car.

It's important to save at least three months' worth of living expenses
in case of an emergency. (Try for 6-9 months)

Make a list of your expenses (rent, bills, food) to see how much you spend each month;
this will help you estimate how much you'll need to save for three months' worth
of expenses.

Store the money in a safe place, like a federally insured bank or credit union.

If you're able to, try saving six to nine months' worth of living expenses instead of only three.

Don't stop once you've built your emergency fund; try to automate your savings so you stash away 10% of your earnings.

When investing, consider the risks and the annual expenses

Invest in an IRA or a 401(k) as soon as you have some income.

Putting all your eggs in one basket can be a risky way to invest; consider a diverse
mix of stocks, bonds, and cash.

Compare mutual fund costs: An "annual expense ratio" of 1.5% instead of 0.5% on a
$1,000 investment could cost you almost $2,000 over the course of 35 years.

Ask about index funds, which tend to have low annual fees.

Think about your goals. Attending college? Buying a home in 10 years? Purchasing a car
in five? Define two financial goals for the long- term future, and make a plan to achieve them.

For more information go to investor.gov.

The best way to help your kids financially is not to give them money but to teach them good money habits. Learning a good earning ethic from an early age and teaching the value of saving will go a long way towards raising money savvy kids.

What is your favorite thing to teach kids about money? Comment below.



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