Millenials are savvy about many things, but financial literacy may not be one of them.
It’s October and kids have gone back to school. Whether they’re in high school or college, your kids live in a financial world nearly unrecognizable from just a few years ago. It’s certainly a different world from the one you or I grew up in.
And although millennials can program every gadget in your house, they may not know how to write a check, balance their checkbook (there’s an app for that), keep a budget or build credit. It’s easy to forget that most of us learned these skills from our parents and that social media may not be the best source for money lessons.
Do parents need to step in and have “the talk”?
The short answer is yes. While the Internet is ablaze with information, that doesn’t mean your kids are reading up on financial literacy. It’s worth investing some time to make sure the fundamentals are covered.
Banking & Budgets
My best advice is to start early. Most banks offer checking accounts for children as young as 13, provided they’re joint with a parent and the child has a valid government-issued ID (PennDOT offers ID cards for $30.50). Saving up the ID fee could be your child’s first budgeting lesson.
Amazingly, two-thirds of Americans don’t have a written budget to track their monthly income and expenses, according to Experian. And you know there’s an app for that, too!
Add to this the alarming statistic that nearly 30% of millennials overdraft their checking accounts and the importance of early budget training is clear. To avoid overdrafts and fees, have your kids link their checking to a savings account to avoid those steep fees. And make sure they know that these savings are good for more than overdraft protection!
Only 20% of millennials say they’ve saved for a rainy day, yet over 80% of college-educated millennials have at least one long-term debt that persists even when that rain starts. Your advice on budgeting can help them with the first statistic; encouraging them to apply for scholarships and grants can decrease the amount of the second.
Scholarships, grants and student loans all pay for college, but only the last option requires repayment. Student loans, while undeniably useful, carry potentially decades of repayment plus interest cost. Have you explained the power of interest to your child—both for savings and on student loans and credit card debt?
Even worse than the addition of interest to student loan debt is default, which can happen if a graduate can’t find a job. And this default is different from most other types of debt because it can’t be erased through bankruptcy.
If your child does take out student loans, you’ll need to talk early on about building credit. Student debt will drag down a credit score, even if it’s currently deferred.
A low-limit secured credit card backed by a savings account will serve a dual purpose: to reinforce that credit is still “real money” and create an active item on your child’s credit report—more indicative of how they handle credit than looming student loans still deferred. Once they’ve paid this card regularly for a year or so—since they understand interest and the wisdom of paying off the complete balance—they’ll have created sufficient credit history to close out the secured card and get a stand-alone one.
Working to create a positive credit history will help your child get other credit, such as auto or mortgage loans in the future. And it may even help with refinancing those student loans at a lower rate.
So, start the conversation early with your child to help improve their financial literacy. You’ll both be glad you did.
Matt Davis is Market Leader for the West Chester branch of BB&T. As a Borough resident, he enjoys serving the community where he lives. Like BB&T, Matt is committed to helping clients of all ages discover what’s right for them and their finances. BB&T partners with EverFi, the country’s leading education technology company, to provide interactive financial education to high schoolers. BBT.com.
It’s best to start before dropping them off for their first day at college.
Each year about 17.5 million students head off to college. It’s a rite of August, marked by a packed minivan in the driveway ready to make the trek toward a new adventure. We leave our babies in a strange land. And with one last hug, remind them to make good choices and please call—at least once in a while.
Aside from buying a home, for many, college is our single biggest lifetime expense. But in all the conversations before the college send-off, did you take time to talk to your children about paying for college?
With total student debt currently at $1.3 trillion, the average Class of 2016 graduate owes $37,172 in student loans, according to Student Loan Hero. While it’s never too late to talk to your child about paying for college, the earlier you start, the better.
Researchers at the University of Cambridge found children’s money habits are formed by age seven. What? Yep, that early.
So, what can parents do to start teaching your young children how to save? Here are a few ideas.
When preparing your shopping list, talk to your kids about the difference between needs and wants. Instead of banking online, take them to the brick and mortar bank or credit union and, if you haven’t already, open a savings account for them. Show them how to go to websites like NerdWallet.com to find and compare savings account interest rates in your area. And when your kids get money for special occasions have them set aside a portion for savings, sharing (charity), and spending.
During middle school, talk to them about setting financial goals. Have them decide on a savings goal. Make sure it’s tangible—writing down a goal makes it real. Make the goal attainable, set a date for completion, and have them plan the steps to reach their goal. Go old school or high tech; there are plenty of options.
Early in high school, have a conversation about your kids’ career goals and what sort of education is needed. Graduation seems far off, but blink and they’re heading to college. You can check websites like FinAid.org/calculators to get an estimate of what college will cost when your child is ready to go.
Strategies for Teens
To help your teens prepare and pay for college, here are some ideas:
- Research the cost of attendance and starting salary of the job they want out of college. College Board has a helpful college and career site called BIG FUTURE.
- Explore scholarships. FinAid and FastWeb have extensive scholarship databases. Your kids’ schools’ guidance and career centers have access to national scholarships as well as local opportunities.
- Get a job and pay themselves first. Kids should set aside a portion of their earnings for college. They may not be able to cover the entire cost of tuition or room and board, but saving enough to pay for books, fees and spending money is a powerful lesson. And in lieu of a traditional savings account, check out options such as 529 Plans or Coverdell Education Savings Accounts.
- Start FAFSA. Complete the Free Application for Federal Student Aid starting in October of their senior year. This information is used to determine eligibility for financial aid. Some schools also require a College Scholarship Profile to qualify for aid. Work Study aid (caveat: kids have to look for and get the Work Study job) can be used towards paying down college debt or covering other costs. StudentAid.gov is another great resource for federal student aid programs.
- Sending your child off to college isn’t easy, but long after the twin XL sheets, shower caddies and the like have outlived their usefulness, the knowledge your child gained by taking an active role in planning and paying for college will reap lasting benefits.
Karen Hassett is Community Education Manager for Franklin Mint Federal Credit Union. As part of its commitment to financial literacy, FMFCU offers financial wellness workshops to the community through its business and school partners. FMFCU is a $1 billion credit union with 10 student-operated high school branches and 30 community branches in the Philadelphia region. FMFCU.org.
Ideas for 2015
As you look forward to the holidays, it’s essential to set some time to ensure you’re ready for your 2015 tax filing so you won’t miss opportunities to reduce your tax payments.
To help, here are a dozen ideas to consider for your year-end tax planning. Of course, please consult your tax professional or financial advisor about tax-saving strategies.
1. Consider deferring income into 2016 if you’re in a higher tax bracket in 2015. Income is taxed in the year received.
2. Review the amount of capital gains realized in 2015 and determine if any capital losses are available to offset the gains. If your capital losses exceed gains in 2015, you can deduct up to $3,000 of the losses from taxable income. Talk with your financial advisor about tax-loss harvesting to help minimize taxes.
3. Consider donating appreciated securities to a qualified charity. This provides a valuable income tax deduction, and you don’t pay any capital gains tax in 2015.
4. For taxpayers over age 70½, make sure required minimum distributions have been withdrawn from all retirement accounts. Withhold monies for paying federal and state taxes to avoid a tax penalty for missing required quarterly tax payments.
5. For working taxpayers, make sure you’ve maximized before-tax contributions to retirement plans. In 2015, you can contribute $18,000 to retirement plans and $6,000 in additional catch-up contributions if you’re over 50. Check your Flexible Spending Account balance and use it by the end of the year. If you don’t think you’ll use it all, check with your employer to see if your plan allows a roll-over (up to $500) into 2016.
6. If you’re eligible to contribute to a Traditional or Roth IRA, you have until April 18, 2016—the deadline for 2015 tax returns—to do so.
7. If you have children or grandchildren who have earnings in 2015 and you want to help them start on the road to a secure retirement, consider setting up a Roth IRA for them. Contributions are limited to the lesser of their earnings or $5,500.
8. Consider making some last-minute tax deductions if you’re planning to itemize and you’re in a high tax bracket. For example, prepay your mortgage payment, make a bigger charitable donation or pay a medical or tax bill early to help increase your deductions in 2015.
9. If your children are over 24 and in the lowest two tax brackets, consider a gift of appreciated securities. You can give up to $14,000 per person annually without filing a gift tax return. If the child sells the securities while in the lowest two tax brackets, there’s no capital gains tax on the sale.
10. If you’re going to invest in a mutual fund in December, inquire about projected timing and size of capital gains distributions from the fund. If you invest right before a capital gains distribution, you’ll be liable for the distribution taxes.
11. If you contribute to a college savings 529 Plan for a relative, you can deduct contributions up to $14,000 per person (you and your spouse) and per beneficiary to reduce Pennsylvania taxes. Income generated in the 529 Plan can be withdrawn tax-free, if the money is used for qualified education expenses.
12. Make sure you pay the correct amount of taxes. If 2015 taxes are more than $1,000, you’ll be subject to a penalty unless 2015 payroll withholdings and estimated tax payments equal the lesser of 1) 90% of your 2015 tax liability, or 2) 100% of your 2014 tax liability (110% if 2014 adjusted gross income exceeds $150,000 for married taxpayers).
Peter K. Hoover, CFP, has more than 30 years of experience as an independent financial advisor. He founded Hoover Financial Advisors, PC, in 2005 and the company has quadrupled since then. HFA was selected by Chester County Chamber of Business & Industry as the 2012 Small Business of the Year. Contact him at 610-651-2777; PeteHoover.com.