Finances are a tough conversation to have - and your child’s financial future can feel like an impossibly distant obligation. But understanding how to handle money is crucial to one’s success when grown. Giving your child a solid financial base and a thorough education on how to manage finances can help prepare her for taking on her own responsibilities as an adult, ensuring that she doesn’t develop bad or irresponsible spending habits. Here are five steps you can take to protect your child’s financial future.
1. Get life insurance for yourself
One of the best ways to prepare for the worst and protect your child financially is taking out life insurance policies on yourself and your spouse. Children obviously cannot work for themselves. If by some tragedy either you or your partner - or both - die, a life insurance policy will give your child financial support to help cover immediate and long-term expenses. It may be morbid to think about preparing financially in the case of your death, but the realities of living with a sudden loss of income are worse. Life insurance is a worthwhile investment to ensure your child is provided for even in a worst-case scenario.
2. Set up a college savings account
If your child doesn’t have savings in place to get through college, he or she will be at a significant disadvantage compared to other students. College students who have to work more than 10 to 15 hours a week will experience a significant negative impact on their education, and will be less likely to succeed in their classes or go on to graduate. Building a college savings account for your child when she’s a newborn allows you to take your time, putting money away bit by bit so you can watch the account grow. By the time she’s ready for her freshman year, you’ll be able to offer some financial relief, allowing her to focus on her studies instead.
3. Give your child a savings account
On top of a college savings account, you should also set up a custodial savings account for your kid as soon as you can. Put a bit of money away in it until he’s old enough to earn an allowance and then talk to him about savings. By setting up a savings account early, you’ll give him an example to follow through with and a strong financial base to begin saving with.
When you give him access to the account, it should be on a restricted basis at first. Teach him how to put money into it and see the number grow over time. Talk to him about the interest the account can earn and how it will generate more interest as he accumulates more wealth. Giving your child a tangible example to look at and a safe place to store his money long-term will help him understand the concrete reality of his current and future financial situation.
4. Name a guardian in your will
Another step to protect your child in the case of your death or incapacitation is naming a guardian. You will need both a caretaker - someone who will take your child into their home and raise them in your absence - and a financial guardian. Ideally, these will be the same person, but they don’t have to be. Your child’s guardian will be able to control their finances and their day-to-day life after you die, which means you want to give it serious thought before 7 years. You also want to have a discussion with the person you’re selecting to communicate your exact intentions, instructions and how you want your child’s finances to be handled.
5. Talk to your child about finances
Although you can save all the money in the world for your child, nothing will prepare them for the complexities and realities of handling finances as an adult if you shield them completely from the financial matters of your own household. Without explaining to your son or daughter why finances and saving matter, he or she may never learn to appreciate the work and organization that goes into maintaining household finances.
When you pay a bill, talk to your daughter about how much you’re paying, why you’re paying it and how much of your income the credit card is. Talk to her about how your paycheck is budgeted out and what sort of financial obligations you have that she may not realize exists, such as a mortgage, car insurance or health insurance.
This doesn’t have to be a conversation you have immediately with your kid - you can wait until she’s a little older - but showing her the realities of what bills you must pay, how much money moves through your household and the significance of the bills can help her fully understand the importance of spending wisely and earning a living. By taking steps early to set your child’s finances up, you reduce the burden and give her some wiggle room before she has to fully support herself. Plan for college, for her adult life and for the worst case scenario. Finances are tough to talk about, but if you take care of it now, your child will have the best shot at a good future.