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Credit-Worthy Children

D_D1A0962o you ever wonder how your financial advisor plans their own financial future? What about the advice they give to their kids? Lately, I have received numerous questions about how I am handling financial lessons with my young adult children. My son just turned 21 and my daughter just turned 18, so both are adults now. We all want our kids to have the best start possible.

I will say that when they were younger, I was a disaster with allowances. I never had the correct cash on hand; I couldn’t remember when I last paid them; and the chores versus money debate was always an issue. As a financial planning team, we had a long discussion on allowances when we read the book, The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber. Our Investment Analyst, William Cox, wrote this review, it’s especially related to finances with younger children.

When the debit card, with the associated mobile app, became available to them, it made my life much easier. With the debit card, I can transfer the negotiated weekly allowance and track that I actually did it. I can see what they spend their money on and I can add additional funds if they run errands for me. They deposit their paychecks from working into the attached savings account, so they can also transfer money back and forth for their own personal spending. This is mostly true for my daughter now, as my son is off at college and on a different budget without an actual allowance. I do not track his spending anymore anyway, as he is very responsible and doesn’t need a helicopter parent. My daughter on the other hand is more of a spendthrift. Her allowance consists mostly of lunch money and some gas money, considering I don’t have to drive her around anymore to her numerous activities. Everything else must be negotiated, and trust me, she is an excellent negotiator.

Following the debit card success, we suggested to my son that he apply for a credit card. At the age of 19, with no credit (and no co-signer by the way), they are typically required to open a secure credit card. We suggested $250, but he went with $500. He was required to put $500 from his savings into a CD for two years in exchange for a MasterCard with a $500 limit. He then charges something every month and pays it off every month from his savings account to build his credit. Having the credit card was invaluable when he drove from Anchorage back to college in Colorado before his sophomore year. His two years is almost up, so his CD will be released back to him. We will follow the same approach with my daughter, but considering her shopping habits, we might suggest $250 for her credit limit.

The next step with my son is opening an IRA. Because the guy is so frugal, is now working while attending school, and never asks us for money, we decided to offer a match up to $1000. We will likely open a ROTH IRA for him when he comes home for spring break. We will add me as a limited power of attorney to help teach him how to invest and manage it. He is truly interested and excited. I am very interested to see what type of investments he wants to buy.

We told him the next step for building his credit is to get a car loan when he has a full-time job after college. He is on track to graduate in May 2017 and as a computer engineer, we anticipate he will get a job. He intends to sell his current older used vehicle, use the cash as a down payment, then get a car loan for a nicer used vehicle. Even if he had enough cash on hand to buy the car outright, which he might, demonstrating that he can pay off a larger loan than just the $500 limit on his credit card, will help to build credit. Especially towards the eventual goal of buying a house. Of course, with this generation and their mobility, who can say for sure if buying a house is in the future? At least he will be prepared.

 

Cathie Straub, CPA, CFP®
Director, APCM Wealth Management for Individuals

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