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How to Raise Financially Responsible Children: Tips to Cultivate Good Savings and Spending Habits

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This blog post is by Nick Hemsted, Financial Advisor at Legacy Financial Group.

As a financial advisor and father of two, I understand the importance of equipping our children with the necessary skills to become financially responsible adults.

Instilling good savings and spending habits in our kids will enable them to navigate the complex world of money with confidence and security.

In this blog, I will share practical tips which include creating a savings plan, importance of budgeting, investing and leading by example, which will help you to create a solid foundation for their children’s financial well-being.

Lead by Example:

Children learn best by observing their parents’ behavior. You have a unique opportunity to serve as role models for your children’s financial habits. Demonstrate responsible money management by budgeting, saving, and making thoughtful spending choices. This will establish a strong foundation for your children to emulate and understand the value of financial discipline.

Start Early:

Introduce your children to the concepts of earning, saving, and spending from an early age. Encourage them to participate in age-appropriate activities that allow them to earn money, such as household chores or small entrepreneurial ventures. This will help them understand the correlation between hard work, financial rewards, and the importance of saving for future goals.

Create a Savings Plan:

Teach your children about the benefits of saving and instill the habit of setting aside a portion of their earnings or allowance. Help them set achievable goals, whether it’s saving for a desired toy or a long-term objective like college. 

Consider providing them with a piggy bank or a savings account to track their progress, encouraging regular contributions and celebrating milestones. It is also recommended to use any money tracking app which will allow your children to see the impact of their financial decision. They can choose to watch their savings balance grow, or they can watch as the balance deteriorates as they choose to spend their money.

Introduce Budgeting:

Budgeting is a crucial tool for financial responsibility. Teach your children the basics of budgeting by involving them in family financial discussions. Show them the importance of managing income effectively by distinguishing between needs and wants. Encourage them to allocate money for savings, spending, and giving, helping them understand the value of balance and long-term planning.

Encourage Philanthropy:

Foster a sense of empathy and social responsibility in your children by introducing them to the concept of giving. Encourage them to donate a portion of their earnings or savings to a cause they care about. This not only teaches them the importance of helping others but also reinforces the notion that money can be a powerful tool for positive change.

Encourage Investing:

They say hindsight is 20/20. Don’t you wish you could go back to when you were your children’s ages and start investing then? It’s easy to say what you would go back and invest in and how great your life would be now if you had started investing earlier. Don’t let your kids have those same regrets. Encourage investing at an early age and get your children involved.

Provide Experience:

Allow your children to gain real-life experiences with money. For older children, consider giving them an allowance to manage their own personal expenses. This will empower them to make their own financial decisions, learn from their mistakes, and develop a sense of responsibility.

Allow your children to gain real-life experiences with money. For older children, consider giving them an allowance to manage their own personal expenses. This will empower them to make their own financial decisions, learn from their mistakes, and develop a sense of responsibility.

Open a Roth IRA and set up monthly contributions. Let your children pick the investments and allow them to track how those investments are performing. Encourage them to research companies they want to invest in and would be proud to be an owner of.

Open a 529 and set up monthly contributions towards their education. Again, allow them to track how those accounts are doing and to see the effect of putting a certain amount away every month and seeing what those contributions become by the time they need to start accessing the funds.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis.

Every state offers at least one 529 plan. Before buying a 529 plan, you should

  1. inquire about the particular plan and its fees and expenses. 
  2. consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence.

For tax advice, consult your tax professional. Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty. Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met:

  1.  must have owned the 529 plan for 15 years,
  2. can only convert funds that have been in the 529 plan for at least 5 years
  3. rollover amount cannot exceed $35,000
  4.  rollovers must be made to a beneficiary’s Roth IRA.

You possess the knowledge and expertise to guide your children toward financial responsibility. By leading by example, starting early, creating savings plans, introducing budgeting, promoting philanthropy, investing, and providing hands-on experience, you can help cultivate good savings and spending habits in your children. By equipping them with these essential skills, you are empowering them to navigate their financial future with confidence and setting them up for long-term success.

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