How Do I Teach My Kid To Save for the Future?

Spring is awesome. The flowers are blooming. The kids are enjoying spring sports, and after a month or so of practice, they look pretty good out there, too. It's also the time of year when many parents consider camps and how else their families will spend the summer.

I've met lots of families, in fact, who spend more time planning their summer vacation and camp schedule than they do their savings and how they'll fund their children's college education, probably because of the immediate-gratification factor. And I get that.

Last month I wrote about building your savings by setting aside 5 percent of your income each pay period.  I think we have to deliver that same message of fiscal responsibility to our children, starting when they're young.  It's kind of like teaching them to keep their elbows off the table or to say please and thank you: as they grow up, they just won't know any different. Manipulating? Yep, but they will thank you for it when they're 30, if not when they're 8.

You can start that message at birth. Each week, put $5 into an envelope marked “savings,” and at the end of the month, deposit it at the bank into an account in your baby's name.  At the end of year five, when he or she starts kindergarten, that figure will be $5 x 52 weeks x 5 years = $1300!  And that's not including any interest.  When you throw in birthday or holiday cash, and the I-was-thinking-of-you cash from Grandma and Grandpa, it all adds up!

When the kids start getting an allowance, let them put 10 percent into an envelope, and take them to the bank each month to deposit it in their account.  Get a receipt to show them the balance.  I have seen the pride in my own child's face at that sight, and it is awesome.

I often hear parents say, “I don't want my child to graduate from college with any debt.”  A respectable goal, to be sure, but not necessarily realistic these days as the cost of higher education increases at a 5 to 7 percent clip and savings at only around 1 percent, if not negative when you consider fees, expenses and inflation...

Furthermore, did you know that loans parents take out for their children are the parents' debt, which they could be repaying month after month even into retirement?  And, if your child changes his or her major, adding more years of schooling and debt, or winds up not finishing school at all, guess what?  You still are responsible for the loan, which means that if you are like me and had children later in life, it's feasible, if not highly probable, that you could be paying for your child's education with your social security income.  Talk about a really bitter pill to swallow.

In 1996, many families began setting up a 529 college savings plan, “an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs,” according to the website www.savingforcollege.com.  The website goes onto say that, “although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free.”

Generally speaking, it is best when the student is not the owner of the assets.  Assets held by a child are treated at 20 percent for purposes of calculating the contribution benefit.  Simply stated, the fewer assets a student owns, the greater the potential for a financial aid package.

My advice on all this: help your child pay for college to the extent you can, but consider how you essentially might be “mortgaging” your own future to give him or her a debt-free start to adult life.  Do you really want to take on more debt as you're winding down your own career?

Personally, I want my kids to understand that if they skip class, it's going to cost them, not me. 

My plan is that I will pay in state tuition, they can take loans for fees, room and board and travel.  When they are about 3 years out of school, I will help them pay down the debt.  They build their credit, "own their education" and hopefully become financially responsibile adults.  A trifecta, or hat-trick if you prefer.

And, in case you're wondering, I don't just talk the talk.  

An oldie but a “goodie” story…Despite my admonitions not to touch my things, my then 5-year-old daughter, Sophie, broke one of my emery boards.  So I went into her room and took 15 cents from her piggy bank, explaining why I was doing it. Many (too many, in my opinion) tears later, my little fiscally responsible flower was starting to bloom. BC

Annie Morrison is an independent advisor representative with and securities and advisory services offered through Commonwealth Financial Network, a Registered Investment Advisor, Member FINRA/SIPC.  Zuma Financial Advisors is located in Reisterstown, MD.  Email her, at annie@zumafinancial.com, or call (443) 468-3280.

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

“The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.”