Raising a Financially Literate Child
There is a clear dividing line in America today between those that are destined to be financially successful and those who will be financially destitute, and the rift between those groups of people is growing each year. The fundamental difference between these groups is a result of their personal understanding about finances. The rich and those who are on the path to wealth have high financial literacy. They are working progressively toward financial freedom. The rest don't, and instead aimlessly wander on their own directionless financial path.
Our school systems, including even the most advanced graduate programs, do not include financial literacy. As a result, most Americans today are not financially literate. Even the recent dot.com company failures in the stock market are directly related to the lack of financial literacy of the leaders of these companies. Clearly, financial literacy is the skill that will be most needed in our fast moving and quickly evolving technological world. Yet, if you don't teach financial literacy to your children, no one else will.
So, the question is, "How can I teach my children financial literacy?" First, understand what it takes to be financially free. The secret of the rich is to build businesses and buy real estate. Independent studies of wealth around the world have shown that this formula works everywhere!How to Get Started
Here are five tax tips parents can use right now in their own business to reduce taxes for themselves and begin their entire family's path to wealth.
- Pay your child age 8 or older a salary. BENEFIT: You move income from your higher tax bracket to them, tax free (if they make less then $4,550) or to their low 10 percent bracket from $4,550 to $10,550 (equals $600 tax on $10,550).
- Pay your child age 8 or older an amount less than $600. In this case, you do not even need to report the income paid to the IRS. BENEFIT: Amounts paid under $600 are not reportable to the IRS yet it is a deduction for your business.
- Make a pension contribution for your child. You can make a pension contribution of up to $6,000 or the amount of wages paid to your child with a simple plan. BENEFIT: You are using before tax money to grow assets for your children.
- Your child can set up a ROTH IRA account, which allows for tax-free growth. Unlike a pension, there is no "day of tax reckoning" when the money is pulled out. The money is never taxed when it is distributed to you.
- Pay your child a salary through a Schedule C (Sole Proprietorship) if this makes sense for your overall tax plan. Salary paid to your child in this type of structure is not subject to payroll taxes.
- Teach your child the power of investing. You are not teaching them to be employees. Rather, use this as an opportunity to teach them how to budget and invest. Reward your child's investments by matching their investment. Your child will learn the cost of a "doodad" (the shiny thing of no useful purpose that seems to draw adults and children alike) when they make choices based on their own resources.
- Teach your child the power of compounding. One of the tax tips above for parents is to pay into a pension plan for their child. Look at the difference timing can make. Which plan would you want for your child? PLAN A: Invest $6,000 per year for three years (child is 15, 16, 17) and receive, at 62 years old, more than $351,000 accumulated. Or PLAN B: Invest $19,600 per year for 12 years (starting at age 50) and receive, at 62 years old, more than $351,000 accumulated. The difference between Plan A and Plan B is the power of compounding. The same amount is accumulated – but Plan A only takes three years, not 12.
- Teach your child the power of real estate. Assume that your child invested that same $6,000 per year for three years in real estate. At a modest 10 percent cash return with 5 percent appreciation, the following would be true: If you invest $6,000 per year for three years (child is 15, 16, 17), in 20 years, the total cash flow would equal $535,312. At the end of 20 years, the asset value would be $293,000. The difference between (1) above ($351,000) and (2) above (535,312 + $293,000) is the power of real estate.
- Find a need and fill it. My client's teenage son loved to work on computers. He quickly built a business that supported small businesses in their computer systems after hours. His billing rate was reasonable – $50 – but much higher than he could have made working a regular job. But, summer vacation was coming. He was used to the level of income, but didn't want to have to cancel out on the family trip. His solution: get some of his computer buddies to fill in on the jobs. He paid them $15 per hour (much more than they would make at their normal hamburger stand jobs) and he billed them out at $45 per hour. He pocked the $30 per hour difference.
- Find a problem and fix it. A family began investing in real estate in their spare time. They soon discovered a niche market in buying houses with run-down yards and "sprucing" them up. The family perfected the technique for what they called "quick-scapes" and soon this service was in demand with other real estate sellers. Their teenage daughter took over that part of the job – overseeing the purchase, planting and watering – and soon had a thriving part-time business.
- Help them find their strengths and capitalize on them. What is your child's passion? One of my client's children loved drawing. He was able to turn that love into a sideline that paid for his college tuition by designing logos for businesses. Your child has strengths that, if properly nourished will help them succeed – in business and life – with delight and excitement.
The opportunities are great now for your children and their future, provided they are prepared to take advantage of those opportunities. Give them a head start by improving your personal financial literacy and save some tax dollars as an added bonus. Then, teach them the same secrets to be rich.