With the holidays soon gone, the annual January spending hangover awaits. It’s around this time when families have to pay credit card bills and face the splurge of spending that they undertook in December.
With the holiday damage on top of mind, it also provides a fantastic moment to help teach, guide or inform your children about money.
American shoppers expected to spend about $1,455 this holiday season, according to Deloitte, and much of that spending will result in debt. According to a Bankrate study, about one-in-four (27%) will take on debt to pay for holiday gifts and 65% don’t have funds set aside or budgeted for all the festivities.
This binge can result in a financial headache come the New Year. While parents will have to develop plans for the sudden spending, it’s also a great moment to talk to children about finances.
Since encouraging a wonderful holiday for the kids is what likely led to the splurge, having an opportunity to provide them with some understanding of the impact that spending and saving can have will allow lessons to be carried over into future years.
To do so, lean on their own funds to help ease the conversation and provide real world repercussions for their financial choices.
Using the allowance to teach about taxes
There’s a high likelihood that you already provide your children with one of the best tools to build money knowledge: The allowance. About three-in-four parents say they give or plan to give their kids an allowance. It’s a fantastic tactic to give children a sense of income. With this income, you can provide them with an understanding of how far their money actually goes each week.
For instance, many people give allowance for chores, and that’s it. Others try to reflect the impact of taxes on allowance by taking out 20%. Instead, blend the two strategies.
While taxes will continue to exist, the tax code (through Congress) creates ways to save. These saving strategies are often ideals that Congress wants to encourage and often come in the form of tax credits for school or home purchases or a myriad of other reasons. Instead of simply taking the 20%, give your child ways to earn the 20% back by getting good grades or showing maturity.
The other side of taxes is that they go to fund services that we, as a society or individual, need. Even if some tax funds are wasted, much of our taxes go towards roads, Social Security, Medicare and countless other purposes of both local and national interest. Instead, if you do take 20%, then transfer that money to their 529 college plan or use it to save for a need they have. That way they see the full scope of taxes from tax optimization to impact, instead of just living their adolescent life with a flat tax rate or none at all.
Start an investment account for long-term saving
Another part of income that we must account for is retirement savings. To save for your own retirement, you likely take out anywhere between 10% and 20% (or maybe more) to fund that future when you no longer can work.
While your children don’t have such long-term needs to worry about yet – they have plenty of time, after all – you can begin laying the groundwork for them to embrace long-term wealth creation.
By allotting a certain percentage of their allowance for investing, they can then begin to see their funds grow over many years. Say a child earns $5 a week or $20 a month. Then taking $4 – or $1 a week – and putting it into a low-cost index fund at the end of the month will give your child a chance to see how their money will fluctuate overtime, depending on when the market falls or rises.
This can also teach them a valuable lesson: once you invest the money, leave it alone. That way they can see their funds drop and rise again with the market cycle.
Show them the 529 to plan for college
For teenagers, it’s now time to begin thinking about the future. And the future for them likely lies in trying to go to college. This gives you the opportunity to show them any finances that you have set aside for them to fund their higher learning. It can also provide a chance to give them clear understanding of how their different college choices could impact their future.
If you have a 529 or other college account, you can provide them with estimations about how much will be in the account by the time they go to college. This can give them a sense of how much they will have, and what level of loans they may have to take out – if that’s the plan – depending on the different school choices they will likely select from.
It also gives you an opportunity to begin that conversation with them about selecting the right college. This can include a conversation about the potential post-graduate value and total cost of admission.
The discussion often boils down to a public versus private school debate, and you can use a student loan calculator to provide them with a basic understanding of how much they will owe when they finish. You should also look at expected income, based on their field of study and school that they’re thinking of attending.
It’s not about discouraging the child, however. Instead, it’s about educating them on the true cost of their education they might have to pay for, once they’re on their own.
Teach them about your goals when you’re gone
As a parent evaluating their finances in the New Year, it’s not just young children that you must worry about. As you age, it becomes just as important to educate your adult children on the state of your own finances.
There are multiple reasons for this. First, in case you suffer a health issue, you have someone that can run your finances in a way that you wish. Second, if you plan to pass down money to your children, it gives them an understanding of your hopes for those funds. And third, it gives them a sense of what they may receive in the future, which can aid their own planning for retirement or other goals.
Too often, though, families fear talking about money. In a recent survey, 19% of children said they would prefer not to receive anything from their parents, as long as they don’t have to talk to them about finances.
Instead, you can use the first of the year to begin the conversation with your adult children to prevent it from becoming such an issue. While this won’t ease the hangover in January, it may go a long way to reducing money stress during future holidays and beyond.