One of the great things I get to experience as a financial advisor is that many of my clients have achieved such good financial security that they are able to help their relatives financially. One of the best examples is grandparents wanting to help their grandchildren. The usual starting place for grandparents is helping to build an education nest egg, usually in a 529 plan.
When their grandchildren get older, my clients will often pose the question of how to help them out without just giving them money directly. Below is a typical conversation. Loving parents can be interchanged with loving grandparents with the same effect.
Client: Eric, our wonderful 20-year-old granddaughter just finished her second year of college and is doing very well. We are so proud of her. We want to help put her in a better financial position for after college, but her parents do not want us to spoil her. Is there anything we can do for her?
Eric: Does she have a summer job or work while at school?
Client: Yes, she is working at a local nursery tending the plants over the summer. She loves the job as she is a biology major.
Eric: Great! One way you could help her is to fund a Roth IRA for her.
Client: Really?! She can have a Roth IRA?
Eric: Yes. Since she has earned income, she can contribute to a Roth IRA.
Client: How much can she contribute?
Eric: She can contribute up to the amount of income she makes with a maximum of $6,000. Let’s say she makes $2,500 over the summer; she could contribute that amount to a Roth IRA.
Client: That is very interesting. Why would she want a Roth IRA?
Eric: There are a lot of reasons, but the big one is that she will have an account that will grow tax free; and by starting at such a young age, she will have extra years for it to grow until her retirement.
Client: I don’t think many 20-year-old kids these days are really that interested in retirement accounts.
Eric: That’s true, but I like to show the miracle that is compound interest and how small deposits made now can turn into large amounts of money in 45 years at retirement. If your granddaughter were to invest $3,000 for the next five years and earn 7% interest until age 65, she would have over $387,000.
Client: That’s amazing! But still, thinking about retirement is a difficult concept for young people.
Eric: True. Another great aspect of a Roth IRA is that it can help with a first-time purchase of a home. There are certain rules in place to allow contributions, including up to an additional $10,000 of a Roth, to be used for the first-time purchase of a home. A Roth account has a great amount of flexibility.
Client: That is wonderful!
Eric: I have helped many grandparents with making contributions to their grandchildren’s Roth IRAs. Some grandparents will match the contributions their grandchild makes to their Roth IRA to incentivize them to save money. Others will just make the entire contribution as a reward for working a part-time job. Either way, the grandchild will benefit. It ends up being a wonderful legacy that can be used by the grandchild to further their financial situation. Also, it can teach them the benefits of saving money. When they start careers down the road and can fund their 401k, they will have already experienced the benefits, and the education and experience can put them on a great path to financial security. I have received rave reviews from people who have put one of these plans into motion and have seen the benefits.
Client: What about her brother who is 16 years old and working at a grocery store?
Eric: Even better—more time to grow, although an adult will have to act as custodian on the Roth IRA until the age of majority.
Client: How do we get started?
Talk to your Merriman Wealth Advisor if you are interested in looking at Roth IRA options for your children or grandchildren. We can help with the custodial set up and investment recommendations.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.
As a dad and a financial advisor, I find myself constantly trying to explain how money works. In my opinion; budgeting, investing, and creating income are topics that should be equally important to my 8-year-old daughter as they are to a 50-year-old client. Unfortunately, for whatever reason, access to financial literacy tools for money management are not a mainstream part of our educational system. With more and more resources available at our fingertips, it is my hope that the next generation will grow up already knowing how to save and plan for retirement way before they get their first job.
Take my daughter for example. Last summer, my then 7-year-old asked me what I do for work (I’m a financial planner). It turns out, her friends were all talking about what their parents did for a living, so naturally my daughter wanted to join in on the conversation. Up until this point I had always told her that I helped people get ready for retirement, which I summed up as a “summer vacation that never ends”. She didn’t give it much thought until other kids started talking about how their parents owned a restaurant, helped people get better as a doctor, or worked on getting packages delivered faster as an engineer at Amazon. When my daughter told her friends that her dad helped people get ready for a never-ending summer break, she got a lot of “Huh?” faces.
I then decided to have a more in-depth dialogue with my daughter around what I actually did. The basics of how investing works seemed like a good place to start. So, using the tools we had at our disposal (crayons, blank paper and a 7-year-old’s imagination) I set out to explain what a financial advisor does. It started with a simplistic explanation of what the stock market is, and by the end of our first conversation, my daughter had learned the rhyme: “Stocks make you an owner, and bonds make you a loaner.”
This was progress! After a few more arts-and-crafts sessions, we had created a story explaining how investing in the stock market works, and it was starting to resemble a book. At this moment, I told my daughter we should try to publish our book so other children could learn about investing, and she turned to me and said, “Dad, you can’t just publish a book. Only authors can do that!” Challenge accepted!
Fast-forward six months, and our rough draft was polished into a finished book. Today, you can find “Eddie and Hoppers Explain Investing in the Sock Market” on Amazon! As a dad and a co-author, I’m very proud of my daughter for helping me create this story and for helping me make the book a reality.
After the book came out, I figured my daughter would stay interested in financial literacy, but I should have known asset allocation and risk management weren’t exactly the most exciting topics for an 8-year-old. I had to find a way to introduce financial topics into everyday life.
Money management for a second-grader is pretty simple. My daughter’s main income sources are: A monthly allowance, gifts from relatives for birthdays/holidays, plus she had a lemonade stand last summer that netted a respectable profit. The problem wasn’t earning the money, the problem was keeping track of it and then remembering how much she had when she wanted to buy something.
So, as a dad/financial advisor, I did what comes natural… I created a spreadsheet to track everything. Turns out, spreadsheets are also pretty low on the list of things that my daughter finds interesting. This is when I had my a-ha moment. I did a quick internet search and found a lot of options for tracking how much a kid earns, spends and saves. Last summer when I was trying to teach my daughter what I did for a living, I did a similar search for children’s books that discuss financial topics and found very little. That’s what inspired me to write our book. Thankfully, this time I was able to find what I was looking for when searching for an app that could help me teach my daughter about budgeting.
Ultimately, I decided to use Guardian Savings with my daughter because it has the right balance of simplicity and effectiveness. Guardian Savings allows my wife and I to be ‘The Bank of Mom and Dad’. My daughter finally got organized, and she consolidated all her savings from the half-dozen wallets, piggy banks and secret hiding spots, so she could make her first deposit. More importantly, when we’re at the store or shopping online and my daughter finds something that she must have, we’re able to open the app and let her see the impact of making an impulsive purchase. Plus, as the parent, I get to decide what interest rate my daughter will earn in her account. Not only do I get to have a conversation about what interest is, but she gets to experience the power of compound interest by seeing her savings grow each month. Talk about a powerful motivational tool!
In this day and age, the idea of teaching your child how to balance a checkbook is outdated. The next generation will live in an entirely digital world. Apps are the new checkbook, and it may be a good idea to teach your children personal finance in the same environment they will be in as adults. Already a digital native, my daughter impressed me by how fast she learned how to use the app, not to mention the principals of saving and smart spending that are encouraged throughout the interface. In a few years, I’ll be able to discuss what asset allocation is and how a Roth IRA works, but for now I’m happy that my daughter can get practice making budgeting decisions and building a strong understanding of the basics. Financial literacy has to start somewhere and the sooner that foundation can be made, the more confident a child will be when it comes to managing money as an adult.
Why is it that when the words “children” and “finances” are mentioned in the same sentence, parents brace themselves like they are about to hear the punchline to a really bad joke? Well, it may be because children and finances are often characterized as two major topics that can cause stress and frustration.
This stress and frustration may be a roadblock, preventing parents from having an open dialogue about finances. Being a financially smart family is so important.
We want to tear down that roadblock and give you a road map to help you, your teens, and even young children develop great financial habits. When every member of your family understands basic finances and sets financial goals together, everyone feels more financially confident and accomplished.
An American Psychological Association survey questioned parents on their relationship with their children and finances. The results revealed that only 37% talk often with their family members about the subject of finances.
Why is it that the vast majority of parents don’t talk about finances with their kids? Maybe most don’t know at what age to begin. Maybe they don’t know what to say. Or maybe they think talking about finances as a family isn’t important
Whatever the reason, you may find yourself as a parent in one of these three categories, needing an extra push to establish some basic familial financial habits. For you and all your children, let’s take a look at some ways to help everyone under the same roof get a better handle on the family finances without feeling the need to be an accounting professional.
Financial Tips for Young Kids: Show How Far Their Dollars Go
Do you often find yourself with your kids at the store having to say “no” to the many toys and candy bars that they have pulled off the shelf? Maybe you want to reward your kids with a little something, but they don’t always understand why that $40 limited edition Lego set may not be in the budget.
That’s because they are used to you being the gatekeeper of their spending. Instead, teach them how to be the gatekeeper of their own spending by giving them a bit of financial freedom under your supervision.
Financial freedom for an elementary- or middle-school-aged child should be exercised through simple, intentional actions. It can be as simple as giving them a small amount of money with the intention of letting them have the final say in how they spend it.
This simple action encourages thoughtfulness and awareness about the cost of something they want, which helps them feel a sense of financial freedom while still under your supervision.
Example: Say you want to reward your child by giving them $5 to spend at the store however they would like. Point them over to the dollar section or by the checkout, making note of the price tags that are displayed. Weigh the options of getting several small things versus one larger item.
They will feel empowered by the challenge of seeing how far their dollar can stretch. This sort of freedom helps them develop the habit of thoughtful spending, and it keeps Mom and Dad from always having to say, “No!”
Practical Goal: Take your child to a store of their choosing at the end of the week (if they’ve earned it) and give them a set amount of cash to spend however they would like. Help them weigh their options and select something that they are happy about.
Financial Tips for Teenagers: Responsibility Comes with Freedom
It’s time to make the pivot from the gatekeeper of all of your teenager’s expenses to a partner in their expenses. Teens are now at that stage of life where they are capable of earning a bit of income, and they need some extra help learning how to manage it.
Whether you and your spouse decide to give them a bit of weekly allowance or encourage a summer job, teens are entering the arena of earnings and need help with spending. It is important to establish basic habits now to help them feel confident in their spending habits in the future.
One of the most valuable skills that can help teens feel more confident with their money is helping them develop financial observational skills. This includes being aware of how much things cost, keeping track of where their money goes, and planning on how to save towards something they want.
This sounds basic, but these observational skills can help them become more thoughtful in their spending. The simple act of slowing down and thinking about how they should use their money will instill confidence and prevent impulsiveness.
Plus, you’ll be able to set financial boundaries with your teens while still giving them freedom to do what they want with their money.
Here is a list of different things you could do to help your teens become more financially observant and responsible.
#1 – Create a Savings Plan for Something Expensive
If your teen has their heart set on buying a more expensive item, brainstorm ways to make it happen. Help them make a savings plan or even suggest splitting the cost with you. Remember, you are their partner; you are there to encourage them, not control them.
#2 – Think of Their Money as a Budget, Not a Limit
Each week, take a few minutes at dinner to ask your teen about what they’ve spent that week. This will help them start thinking of money as a budget, not a limit. Ask them if they were happy with how they spent their money or if they wish they had used their money in a different way. All answers are great for learning.
#3 – Start Off with an Allowance at First
If your teen does not yet have any sort of income, consider giving them an allowance each month—an allowance that is contingent on something that you and your teen decide together. There is a sense of satisfaction that comes from earning money and choosing how to spend it that teens should begin to experience.
Practical Goal: Read these three examples together with your teen. Talk through how these examples can establish good spending habits, then select at least one of the examples to implement in the following week together.
Financial Tips for Parents: Take Charge of Your Finances and Give Wisdom
As parents, you and your spouse are in charge of leading financial conversations. Including your children in certain financial decisions can help you and your children be on the same page when it comes to money.
It’s not necessary for them to be aware of all financial decisions between you and your spouse. Kids and teens won’t understand high level concepts yet, but you can help your kids be more conscious of money when they have a say in casual, familial financial decisions.
A familial financial decision could be something like comparison shopping for family car insurance plans, but think of ways to involve the kids in that process that is appropriate for their level.
The first step to create an open dialogue with your children is to help them understand how their financial actions make a difference. When your kids feel like their voices are being heard and taken seriously, they will be more likely to actually want to talk about financial matters.
Just talking about how to spend your Saturday night together, weighing options and assessing price points of different activities, can help them better understand why sometimes the decision to do something is “no” and other times “yes.” Familial financial unity begins with frequent, honest discussions.
Example: Let’s say that you and your family decide to save up for a family vacation. Each member of the family decides how they are going to help contribute to this family goal.
Your youngest one may choose to eat at home instead of getting that after-school Happy Meal. Your teenager may volunteer to babysit the younger kids longer once a week so that a parent can get a few more hours in at their part-time job.
The parents can include a vacation savings allotment in the family budget as a way to slowly work up to the goal. With everyone playing a part in the goal, each family member can feel like they are contributing to the vacation.
Goal: Pick a family activity that appeals to everyone, figure out the estimated cost, then list out ways that everyone would be capable of contributing. Each week, check in on everyone’s progress to see how close you and your family are to that specific goal.
Now call your family together and set your goals in motion!
Written exclusively for Merriman.com by Madison Smith
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.
COVID-19 has impacted jobs across all sectors, and State Unemployment Agencies are reporting an unprecedented backlog of claims. We have been hearing from our clients of a desire to assist their adult children financially. Many of the questions include how and what kind of support to provide and if it makes sense. If you are in this situation, here are some ideas on how to temporarily assist your adult children during a financial emergency.
Start an emergency cash fund for your child.
Make a one-time deposit or smaller, more frequent deposits to a high-yield savings account (like Flourish).
Fun idea: Many banks or credit unions offer change deposit programs. They’ll round up your debit card purchases and transfer the extra change to a savings account. Think of it as a “Change Jar.” It adds up quicker than you think!
When your child encounters a financial emergency, make one-time distributions or loan them the money. Anything they payback can be put back into the savings account for future needs.
Gift them highly appreciated shares of stocks or mutual funds from your Non-Retirement accounts.
It could potentially benefit you by helping you avoid the capital gains tax if you sold the shares while they were still in your account.
After the shares are gifted to your child, they can choose when to sell the assets, and they will incur any capital gains tax on what is sold. Structuring your giving this way can potentially reduce taxes for the family.
Discuss this option with your Merriman Wealth Advisor to make sure it fits into your Financial Plan.
Offer small cash loans to cover emergency expenses.
Discuss a payment plan that can start once your child’s financial situation improves.
If mutually agreed upon, an interest-free loan with a small monthly payment is still more helpful than anything any bank could provide to them.
It never hurts to have the agreement in writing and signed by both parties.
If you can’t provide an infusion of cash, little gifts can still make a big difference!
Give gas or grocery store gift cards when you can.
Meal prep large casseroles or frozen meals that can be heated quickly and serve many portions.
Offer childcare when you can.
Help them review all options in their own financial life.
They may be able to take a special distribution from their own IRAs or 401(k)s for hardships due to COVID-19.
Do not co-sign a loan for your child. As much as you want to help them, you could become liable for the loan, and it can negatively impact your credit history.
Do not ignore the tax ramifications of using retirement assets such as IRAs or annuities to give cash to your child. These assets can be taxed as ordinary income and have the potential of significantly increasing your income tax liability.
Do not stretch your own finances too thin. You need to protect your financial security first. We always recommend discussing large gifts with your Merriman Wealth Advisor, whether they be to charity or a loved one.
As parents, it can be extremely difficult to watch our children struggle financially and equally as hard to balance helping and overreaching. When making these types of decisions, we find that an objective third party like our advisors can help you make a decision that works for everyone. We encourage you to reach out if you need guidance with how best to help. We are here for you and your family.
As we’re experiencing such a strange and challenging time, many people find themselves wondering what their families did in the past to get through difficult economic times. We may remember little snippets of stories told by our elders or passed on through our family, but often wish we knew more.
As wealth advisors we know firsthand the importance of legacy planning through legal documents and also believe in the value of sharing the essence of who you are for future generations to come. In this document, we provide ideas on how to craft a Family Legacy Letter to share your life story, personal values, beliefs, and advice for future generations.
Now is a great time to pass on your values and share experiences with your heirs.
The idea of losing ourselves to dementia is a distressing prospect that people often don’t like to consider, let alone plan for. When we think about retirement we like to imagine the fun things: grand vacations, new hobbies, travelling to visit family, and spoiling the grandkids – not the exponentially rising cost of medical care and long-term care facilities. It’s an unpleasant reality that many financial advisors don’t like to address with clients, because they don’t want to be the bearer of bad news and they don’t have any easy answers.
I might not address these difficult considerations if Alzheimer’s didn’t run in my family. I lost my father earlier this year. He no longer knew who I was before he passed away, just as his father forgot him when he was my age. As a financial planner, I think about my own finances and eventual retirement more than the average person, and along with my retirement planning, I must ask myself uncomfortable questions and plan for a future I hope not to have. I help my clients tackle these concerns too, because one in three seniors currently die with some form of dementia and there are steps we can take to ease the burden on ourselves and our families.
Developing a comprehensive plan with a financial planner is one key step that is better taken sooner rather than later. Waiting until dementia has taken hold, like my father did, can lead to uncertainty and lingering doubts during an already stressful time. A comprehensive plan will include estate planning, investment recommendations, insurance coverage, and a cash flow analysis that incorporates factors such as the rising cost of medical care. These are all important factors for anyone who plans to live into old age, whether dementia is a specific concern for you or not.
Nearly as important as looking at the numbers is building a relationship with a financial planner you meet with regularly. The more I am able to get to know my clients and their unique situations, the better I am able to identify concerns and help make sure their wishes are carried out if they can’t advocate for themselves. Having dementia also puts people at greater risk for elder abuse, which regular meetings with a trusted financial planner can help uncover or prevent.
At Merriman, we regularly work directly with our client’s other professional advisors, such as accountants, estate planners, and insurance agents. Having a team of professionals that can work together on your behalf is valuable for everyone, but it’s vital for people who can no longer recall the specifics of their financial situation. We also help clients identify family members and other trusted individuals that we can contact in the event that they no longer seem able to make important financial decisions. Many people chose to proactively include their loved ones in financial planning meetings, so their loved ones develop a trusting relationship with their financial planner, and have the peace of mind of knowing who to call if they need help.
We at Merriman want our clients to know that families struggling with dementia have our support. If you have questions about how best to prepare yourself or your family, please don’t hesitate to contact us.