Is it possible to financially prepare your child to become a millionaire? The answer is yes, especially if you have knowledge about proper financial accounts that can lead to your child's financial freedom.
Let's look at the key accounts that parents should open to ensure their child's financial future is secure. Plus, you'll discover why parents play a critical role in teaching their kids smart financial habits.
When do you start building a child's wealth? Private wealth advisor, Dawn Dahlby, recommends that parents start by opening these accounts for their children:
Taxable Investment Account
This type of account is based on after-tax dollar investments. Any gain will be taxable at the appropriate rate applicable to capital gains.
By opening this investment account, your child can access this money at any time. This account can also be funded with income that you have not directly generated, such as gifts or inheritances. Dahlby uses the example of a child who receives $1,000 a year in cash for his birthday or holidays. Your parents may choose to put 25% of these gifts into an investment account of this type. This represents a contribution of $250 per year.
By investing $250 per year at 8% (the average rate of return over 18 years), Dahlby said the balance of this account would be ~$10,000.
"This approach allows the child to live in the moment while planning for their future," Dahlby said. "They can enjoy some of their money now while saving for their future."
Roth IRAs accounts are a long-term savings option that is very flexible in how you contribute and offers the potential for tax-deferred earnings and tax-free withdrawals. Pay taxes when you contribute, and in return, you can make withdrawals (qualified with tax exemption) of potential earnings for your contributions.
A parent who decides to open a Roth IRA account for their child should ensure that the child is employed, as the Roth IRA is contributed with income generated or earned. This is ideal for families with a family business where parents can "employ" a child in their business or keep track of the child's self-employment through activities such as childcare or dog walking. The money earned can be used to fund the account and will grow tax-free.
Unlike a taxable investment one, Dahlby said the boy would not be able to touch the proceeds in his Roth IRA. Like adults opening a Roth IRA for retirement, the only way they could take money out of the account without incurring a 10% penalty would be by reaching the age of 59 1/2 years.
For example, suppose a parent owns a business. You hire your child as an employee who earns $6,000 a year, the maximum amount that can be contributed each year for a Roth IRA whose holder is under age 50. The child could put the full $6,000 into their Roth account and maximize it each year.
"Assuming the child starts working at age 15 and invests their $6,000 annual earnings into their Roth IRA (assuming the same 8% rate of return), the child will have ~ $28,000 by the time they are 18," Dahlby said.
There is also the option for parents to open a custodial Roth IRA for their child, which works similarly to a Roth IRA. In a custodial Roth IRA, a parent or other legal guardian is assigned as custodian of the account.
3. Savings or checking account.
Parents who want to start by covering the financial basics can open their child's first savings or checking account.
While it is possible to start teaching the responsibility of money with a fixed weekly cash contribution, doing so through an account will allow your child to keep track of what is happening with their money, rather than a means of control, it is a tool they can use to meditate on the use of money.
Promote responsibility and autonomy:
To encourage responsibility and autonomy, you can allow your children to manage small amounts of money, which gives them the opportunity to make decisions and face financial responsibilities. Learning to manage their own money from an early age helps them develop valuable skills, such as setting financial goals, making smart spending decisions, and understanding the value of hard work.
The more you talk to your kids about money, the more you'll teach them to make smart financial decisions. This will help the child later in life when they need to make decisions about adjusting their spending habits and allocating what they earn to get closer to their goals.
Topics such as credit are important in helping children understand better. Although many people may consider loans to be bad, teaching your child to use them and generate a good credit score from a young age will allow them to meet their goals more easily.
Teaching your children to manage their finances from an early age is an invaluable gift that you can give your children. Smartkeep accompanies businessmen and entrepreneurs, as well as families to keep their numbers green.