Photo by Fabian Blank on Unsplash
I see a lot of people asking advice on how to help their children to transition to financial adulthood, particularly when they’re heading to college or otherwise leaving the nest. As a parent of four teenagers, this is something I’ve personally been navigating for the past few years. Here’s what we’ve done:
Bank accounts
When they get a job, we open a checking account at our local bank. We’ve left their childhood savings accounts as is. They get a debit card with the checking account, and the bank imposes a $50 limit on debit card usage per day (that limit can be adjusted in the future). In my mind, the limit isn’t so much to control their spending, but it limits the risk if the debit card number gets stolen.
They’ve all been under 18 when opening the account, and so my name is on it with theirs. I plan to leave it that way until they’re out in the world with a full-time job. At the moment, it means I can easily transfer money back and forth between our accounts.
Their earnings get deposited into the checking account, and then as the balance grows we talk about moving money into savings. That account at the local bank gets barely any interest, but is adequate until they save several thousand dollars.
Once they have around $5k in the bank, we open a high-yield savings account. I opened one for my daughter at age 15, so it’s held as a custodial account under my name. My son was over 18 when he earned enough to make it worthwhile, so he did his own research and opened an account on his own.
Retirement
For my older two, I’ve also had them open Roth IRAs shortly after they start working. For my daughter, I opened her a custodial Roth IRA at Vanguard. It requires $1,000 initial deposit. I wanted her to contribute $100 per month, but she felt like that was too much, so we settled on $50/month. It comes out of her checking account automatically every month. This is where you can see the miracle of compound interest – even if she does nothing else but add $50 per month for the rest of her working life, she will end up with about $300,000 in that account, and only 10% of that will have been money she contributed; the other 90% will be tax-free earnings. My son was over 18 when he had enough money to start a Roth, and so I suggested what he should do, but I don’t have access or control over that money.
Credit
Building a credit history responsibly is important to me. We live in a world where credit scores can affect our lives in many ways, and I want my children to be successful and smart in making credit decisions. For my own convenience, I made my two older children authorized users on my credit card. They’re permitted to use it with my permission or for my benefit, such as picking up groceries for me, or filling my car with gas. My son uses it to book his own travel arrangements to come home from college on breaks. [Having him book his own travel is not only one item off my to-do list, but is another real step towards independence.] I purposely used a card where we all have different card numbers, and the statement shows our use by person, so I can quickly scan their purchases to make sure I’m on board. They’re also allowed to use it if they want to make a purchase and they’re over their daily limit on their debit card. Then they tell me how much they spent, and I transfer the money from their account to mine.
An unexpected benefit I found is that even though credit card companies often say that they won’t report credit card activity for authorized users on their credit report, that’s apparently not entirely true. My son had a 720 credit score as soon as I added him to that account, when he had no other credit history.
Lastly, that same son opened a Discover student credit card in his own name during his freshman year of college at my suggestion. The reason is primarily that he won’t be on my card forever, and so he will lose that long credit history he’s currently enjoying (I’ve had that card since before he was born!). I want him to have a credit card that he can hold onto for a long time, which will strengthen his credit score over time. I made it clear that he should use it for one recurring charge per month (I think he’s doing his NYT subscription) and he needs to set it up to autopay in full every single month.
Spending
I don’t monitor or question my teens’ spending very closely. Part of my role is to allow them to learn how to use money, and that isn’t served by my micromanaging their decisions. I’d much rather have them make mistakes with their money at this point, when we’re talking about small dollars, rather than when they’re 25 and have the potential to make far larger mistakes. They all know I have access to see their paychecks and debit card activity, but I’ve never made a negative comment about how or where they’re choosing to spend their money.
We also talk about money regularly, even if it’s just a mention about how much more they earned the week they worked a lot more hours, or conversation about a purchase they’re planning to make. I can see them gaining confidence and skills around making money decisions, which provides me with more peace of mind as they’re spreading their wings.
If you have anything to add to this topic, please let me know! It’s something I think about often and love to talk about. I have another blog coming up soon about the real-world lessons my son observed through my car-buying process at the dealership. It was an invaluable experience for him.