As an opening to this series on Teaching Children about Money, I want to share my desire for educating the next generation. A common pattern that we see with many of our clients is that they were taught very little about money from their parents. The pension systems that their parents relied on for retirement forced saving and so there wasn’t a whole lot to learn – or pass on to their children. Unfortunately, this generation has to learn how to do things differently than their parents or grandparents. On top of that, a lot of what we learn in childhood and young adulthood about money dictates our financial behavior for many years to come.
Priority of Saving
One of the best ways to introduce saving and investing is to talk about “buckets.” These buckets include things like cash savings, 401(k), Roth IRA’s, IRAs, and taxable investments. But which should be funded first and how much should go in each? While the list below depends on the person and goals, this is a rough outline that many financial planners would agree with. This list would certainly change depending on their goals – for example, if they want to buy a home in the near future, the priority would be quite a bit different. This is geared more toward the part-time high school/college student or young worker.
Cash Savings - $1,000
Company 401(k) – Only enough to get the full “match” if they have it
Debt – Pay off high interest debt
Cash Savings – 3 to 6 months of non-discretionary expenses
401(k) or Roth 401(k) – Max out contributions
Roth IRA or Traditional IRA – Max out contributions (income restrictions apply)
Taxable Investments – Leftover amount
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.