Financial Literacy – Kid’s edition – Part One

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On today’s journey I want us to discuss something especially important in my own home and that is the topic of finances.  It is important to understand how money works and describing to children how we operate with money.

Table of Contents

    What does this mean?

    Financial literacy is the ownership of skills and knowledge particularly that equips you with making educated and valuable choices regarding finances. Well, as an adult we learned the hard way as we had to get a job first and then understand how to balance our budget, pay taxes, bills and all these different aspects, which can feel like it is falling on top of our heads. Then we learn how to deal with these new responsibilities and manage it. However, imagine if you were given the gift of understanding finances ahead of the game even understanding how to manage, coordinate and move your money around so that by the time you are in adult you have some equity earned interest an increased in your dollar just by investing in yourself.

    Conversations

    First wallet, always starts the excitement.

    We bought this wallet at Oldtown in Orlando,FL. He loves it!

    In my household with our own children, when they turned five years old and they were able to write out their own names, I started individual bank accounts for them each. You can do a savings acct for them in the meantime but if you want them to understand the process starting at five is an excellent beginning point. If they had a deposit from their grandma, uncle, birthday, tooth fairy they would walk into their bank (with me as an escort) and do a deposit at the teller; I would stand by to assist but they would understand the jargon that was being spoken to them in that transaction and be able to answer questions and begin to understand the process. This is the important piece as they are physically part of these transactions. We typically would open a savings and checking account.

    Big Picture and Expenses

    We as parents concentrate on the big picture expenses for example: shelter, food, clothing, even entertainment. We also maintain anything they may need, which can include technological items such as computers, phones and gadgets for school and fun. Sometimes my kids want the latest game or a fashionable sneaker or trend and something of this nature I ask them about what they have in their allowance or what other items they want to do in the house to help work for these. So, how does this work?
    There are a couple of methods, but I will give the example of low end and high end. This just indicates the parent contribution not including gifts that you may receive. Other rules of financing and banking you should consider are the following.

    TypeBank RulesRate/AmountDetails
    Interest RatesCan range and payout annually or be accrued and offset monthly with your statement. 0.001% – 0.06%Some banks offer reward programs for a higher balance that can increase this. 
    Check with your financial Institution.
    ResponsibilityThe manager of the account is the parent.  However, when the child turns 13, they can usually download app and maintain account.  If it is a checking account since an adult is listed on the account a debit is usually issued.This rule can vary bank to bank this why financial education is important at an early age to prepare them for when they are a teenager. 
    Check with your financial Institution.
    FeesFees (Maintenance, overdraft, check bounce) can apply but for a child or student savings/checking account they can be waived$12 – $60To avoid Fees, you may need to keep a daily balance of $500 to $1500 after the age of 24. 
    Check with your financial Institution.
    TaxesIf the yearly balance does not go over 15000, taxes will not apply on the account.  Normally these deposits are post tax your individual income.  For the child, they are not required to report as you are listed on the account.  Until they are a legally recognized as an adult by the government standard and no longer a minor.$260 and up.For a single person, with no dependents at the age of 18.  They may owe $260 of a $2,500 taxable income.  Based on the IRS tax table, please speak with your accountant or taxing professional for your individual advice.
    FDICEach individual account at any bank is covered for up to $250,000.00 at any time.  If you accrue more than this amounts you may need to open a different account, trust, or fund.Not covered 250,000.01Individual accounts $250,000.000
    Joint accounts $500,000.00
    Check with your financial Institution.
    Life InsuranceExcellent way to plan, thinking positively.  Because this money usually has a fixed rate, that you can borrow from for braces, college, first car, down payment on a home)$35 -$100 MTHEvery provider is different.  Best to choose from are the Mutual of Omaha, Gerber, State Farm – reach out to find out more details.

    Now that we have an idea of the rules. How do we figure out the payments of allowance or money for our children? First you will need to set up three accounts Checking, Savings and Insurance. Of course, these are suggestions, but you may want to take advantage early.

    TypeAvailabilitySocial Security NumberPaymentsFrequencyDown PaymentFace ValueGuardian
    CheckingOnce Social Security is issued.Yes$1 – $26Bi-Weekly$25 – $1500Annual AmountParent only, at 13, a child can manage with parent, transitions at 18.
    SavingsOnce Social Security is issued.YesVariesVaries$125 – $500Annual AmountParent only, at 13, a child can manage with parent, transitions at 18.
    Insurance14 days old to 17 years of age.No$35 – $100Monthly or annually$5,000 – $500,000Parent until 18

    Plan Capital for Equity

    Now, have your children walk through the process with you. Understanding the game plan, in my mind is the first step. I have two options that can work for any income. They are called Low End and High End. Again, this does not include gifts or birthdays but just the payments on the parents’ end.

    TypeCheckingSavingsInsuranceOther
    Low End – AllowanceBased on age$125 at beginning (year 0)
    $500 at age 18.
    $35 a month (Based on policy ages 0-17 then transfer to whole life policy for adults)NA
    High End – AllowanceBased on age$125 at beginning (year 0)
    $576.9 bi-weekly from (0 – 16)
    $14999.40 a year total (under the $15,000 taxation mark)
    $250,000.00 lifetime (for this period 0-16 years)
    $100 a month (Based on policy ages 0-17 then transfer to whole life policy for adults)NA
    Bonus – Tooth FairyNANANABased on age per tooth. 
    Ex. 5 years old = $5.00.  20 teeth by rate = $100. 
    Have the child take the cash and make the deposits.

    Allowance Types

    What it looks like. Be warned there are many graphs here, these are estimated.
    For both Allowance types: Low End and High End, the checking stays the same.

    YearType RatePaymentsYearly Amount
    0Checking $   1,500.0011500 (Continued threshold)
    1Checking $           1.002626
    2Checking $           2.002652
    3Checking $           3.002678
    4Checking $           4.0026104
    5Checking $           5.0026130
    6Checking $           6.0026156
    7Checking $           7.0026182
    8Checking $           8.0026208
    9Checking $           9.0026234
    10Checking $         10.0026260
    11Checking $         11.0026286
    12Checking $         12.0026312
    13Checking $         13.0026338
    14Checking $         14.0026364
    15Checking $         15.0026390
    16Checking $         16.0026416
    17Checking $         17.0026442
    18Checking $         18.0026468
    19Checking $         19.0026494
    20Checking $         20.0026520
    21Checking $         21.0026546
    22Checking $         22.0026572
    23Checking $         23.0026598
    24Checking $         24.0026624
    25Checking $         25.0026650
    26Checking $         26.0026676

    The Low End and High End types really apply to the savings account. The idea in this plan is to make at least the low amount or any up until the high amount. You do not want to exceed on this account more than $15,000 per year but you want to have at least $125 until they turn 18 then $500 to prevent fees. Of course, if you are a millionaire, you can do whatever you want but for the average person this can meet multitudes of income ranges and teach your children how to save.

    YearType High EndPaymentsYearly AmountYearType Low EndPaymentsYearly Amount
    0Savings $ 500.0015000Savings $ 125.001 $ 125.00
    0Savings $ 576.902614999.418Savings $ 375.001 $ 375.00
    1Savings $ 576.902614999.4
    2Savings $ 576.902614999.4Total500
    3Savings $ 576.902614999.4
    4Savings $ 576.902614999.4
    5Savings $ 576.902614999.4
    6Savings $ 576.902614999.4
    7Savings $ 576.902614999.4
    8Savings $ 576.902614999.4
    9Savings $ 576.902614999.4
    10Savings $ 576.902614999.4
    11Savings $ 576.902614999.4
    12Savings $ 576.902614999.4
    13Savings $ 576.902614999.4
    14Savings $ 576.902614999.4
    15Savings $ 576.902614999.4
    16Savings $ 576.902614999.4
    Total255489.8

    For the life insurance, this works by specific policy. As a child’s medical is usually not put into question and the application process is simplified. Anyone can open a policy as the social security number is truly not needed. As low as $35 a month to $100 a month or annually from $420 to $1200 you can buy coverage. Typically, this covers death as it is a life insurance policy. What is not told to you is that the face value, which can be $5,000 to $500,000.00 is based on an index amount. And when the policy matures you can use it, which is typically at the age of 100. When the child is turning 17, you can begin to transfer the plan to whole term for an adult and they can take over the payment. For example, if they need braces, or want to buy a car, or later a down payment on a house, depending on where you are in your policy you can borrow that cash from the policy. Whether paying it back or not, which will deduct from the face value. Other benefits, include not needing to be reported on taxes and the money is all post taxable dollars. This is how the wealthy maintain their financial health within their portfolios.

    Piggy Banks

    All my children have one that is completely full of money from when they were born. We have never touched it and when they graduate high school it is theirs. One of the banks if from Tiffany’s so I ask that they manage with care. They also have individual banks like superheroes that they fill and often forget about.

    I still recommend a good old fashion Piggy Bank. Once they get full, take them and deposit into their checking and savings accounts. We consider this for them as income and explain the 2/3 policy.

    The 2/3 Policy is a strategy

    When you are an adult, you need to pay bills that are deducted from your wages that include taxes, utility, living expenses, gift, entertainment, miscellaneous, etc.  This concept teaches the child that no matter how much money they receive they will be responsible for a “bill” payment in the amount of 2/3 of the income.  You will truly only enjoy about 1/3 of it.  To plan for this mindset, in the example below I have $100 as the hypothetical gross amount in the piggy bank.  Here 1/3 of that money goes into checking as net and 2/3 into savings where it is saved for a future bill as the deduction. Although this really isn’t going anywhere it is stashed away. 

    Gross = Amount of Piggy BankNet = CheckingBill (Deductions) = Savings
    $100$33.33$66.67

    The best part is when they get their first paycheck/statement they will understand why they are “missing” the gross amount.

    Please leave comments below.

    Let me know, if you do something like this with your children, or if you try this method how did it work for you?

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    Check out this complimentary, Podcast about Financial Literacy for Kids and thank you for joining me on this journey of Fannytasticlife!

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