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4 Steps to Help Your Child Achieve Financial Success

4 Steps to Help Your Child Achieve Financial Success

Clients often approach us looking for advice on how to help children with financial planning post-college and beyond. We cannot stress enough how crucial it is to teach your children about the importance of money management and establishing good credit. While teaching your child these fundamental life skills, keep in mind that your main goal should be to provide guidance and support, while respecting your child's decisions and encouraging their independence. Below is a list of 4 practical steps that you and your child can take to get on the path towards financial success.

1. Have Your Child Create a Budget They Can Stick To

  • Assess the current financial situation - Before formulating any plans, it's important to understand where your child currently stands financially. Establishing a budget will help them get organized and prioritize their spending. Have them take into account any of the following that apply:
    • income sources
    • savings
    • expenses
    • debts
  • Set realistic goals - It’s important that they set achievable goals that they can stick to over time.
    • Have them break down their objectives into smaller pieces to make it more manageable.
    • Have them consider both short-term and long-term goals, such as saving for a house or car or repaying student loans within five years or less.
  • Utilize investment opportunities - Taking advantage of investment opportunities can help maximize returns in the long run and provide an additional cushion against economic fluctuations or unanticipated events. Investing in stocks and mutual funds is one way to diversify their portfolio while potentially earning higher returns than traditional savings accounts offer. They should also start saving in a retirement account such as a 401(k) or an IRA that can offer tax-relief benefits as well as growth potential over time. If making contributions to a 401(k), encourage them to make the deferrals automatic and to contribute enough to receive the employer match if there is one. The rule of thumb to always advocate: The earlier they start saving, the better. 
  • Keep up with the changing financial landscape - With the financial markets constantly evolving, it’s important that they stay informed about changes that could affect them such as interest rate hikes or new tax laws. Keeping track of financial news, analyzing trends, and speaking with professionals will help ensure that they stay up-to-date on these developments and adjust their strategies accordingly if necessary.

2. Establish a Good Credit History

Establishing good credit involves your child understanding their credit score (if any) and taking steps to build and improve it. Some key steps to take include:

  • paying off any existing debt,
  • keeping balances low relative to the overall available credit limit,
  • avoiding applying for too many loans at once,
  • making sure to pay bills on time,
  • staying informed of any changes in lending requirements that may affect the terms of any loans, and 
  • checking their credit report annually to identify any errors or inaccuracies that should be corrected.

Credit card - When getting a credit card for the first time, your child should keep in mind that building good credit takes time and diligence. Therefore, being patient and consistently adhering to responsible practices is essential for developing positive payment habits and an excellent credit history.  Below are several important things to consider.

  • Can they afford it? - It is essential to understand their own financial situation to make sure they can afford future payments before applying for a credit card.
  • Research different credit cards in order to find one that best suits their needs. When comparing different cards, consider factors such as:
    • annual fees
    • rewards programs
    • interest rates 
    • additional fees, such as late fees, foreign transaction fees, or balance transfer fees
  • Read the terms and conditions of the credit card agreement before signing up so that they know what rights and responsibilities they have as a cardholder.

3. Consider Opening a Joint Investment Account

Another great way to help your child establish good credit is by opening a joint investment account with you. A joint investment account allows two people to combine resources by investing their money into a shared account. Below are a few important considerations.

  • Both people will share in the risk and rewards of investing.
  • With a joint account, it is easier for someone with limited knowledge or time to benefit from joint guidance and decisions.
  • Making decisions together can help avoid any disagreements that might come up when investing alone; it can also ensure unnecessary risk is limited.
  • Diversifying investments helps reduce risk.
  • Consider sponsoring a plan where you match your child's contributions.

4. Consolidate Student Loans

Consolidating student loans can be a great way to save money and simplify your child's payments. Consolidation is the process of combining multiple loans into a single loan with a new interest rate, payment term, and monthly payment amount. There are several benefits to consolidating student loans, such as:

  • Lowering interest rates: Consolidating student loans could possibly lower their interest rates, reducing the total cost of borrowing over time.
  • Streamlining payments: With consolidated student loans, they will only have one loan to pay instead of multiple. This makes managing debt easier and more convenient by having fewer bills to pay each month.
  • Increasing flexibility: Consolidated student loans may provide added flexibility through longer repayment terms, allowing them more time to pay off the debt without accruing additional interest. Additionally, it may also be possible to change repayment plans if their financial situation changes or if they experience hardship in making payments.

Questions and/or interested in how this applies to your financial life?

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