Written by Wendy Taylor and Mike Schultz 

With high school graduations approaching, this is a great time to review college savings strategies, which can be leveraged to teach children and teens financial literacy around personal banking, the value of money, their first income tax return, plus learning a little about credit and borrowing. A solid understanding of personal finances will position kids to successfully navigate the transition to adulthood and independence.

Saving for College

As a parent of a freshman in college attending an out-of-state school, Associate Wealth Manager and Equity Trader Wendy Taylor can attest that setting aside money early and regularly is the best way to go. Those 18 pre-college years went by fast, and now her son’s out-of-state public university cost is $60,000 for the 2024-25 school year – and private universities can cost more than $85,000 per year. However, Wendy knew that daunting numbers can be significantly mitigated by the power of compound growth and dollar-cost-averaged contributions over time. With this powerful knowledge in mind, she opened and scheduled regular deposits to a dedicated tax-advantaged, education savings account, also known as a 529 plan. Now, her family doesn’t have to worry about paying for expenses completely out-of-pocket or take on additional loans. 

You don’t necessarily need to be ready to pay for all four years of college through savings; having enough savings for your family to be able to afford the remaining out-of-pocket cost can also be a worthy goal. Saving earlier is always better, but it’s also never too late to start. A variety of investment options are available within most 529 plans, allowing you to choose more aggressive options early on and more conservative options as your child nears high school graduation. 

529 Plan Tips:

• You can choose any state’s 529 plan, and none are subject to federal tax on earnings or withdrawals if the proceeds are used for qualified educational expenses. 

• Enrolling in your state’s 529 plan may also provide you with state tax advantages, and each state offers different investment options and features (some are prepaid tuition plans rather than savings plans). Take the time to compare 529 plans and choose the one that best suits your financial goals.

• Anyone can contribute to a 529 plan. This can be a great way for grandparents, aunts, uncles, and friends to contribute to the future success of your children. Your children can even contribute to their own 529 accounts!

Financial Literacy

In addition to family savings and planning for college expenses, Wealth Manager, Research Analyst, Financial Planner, and parent Mike Schultz notes that it is also important to prepare your children for financial independence as they leave the household. Creating solid financial literacy for children and teens is critical to successfully managing the college years and financial opportunities during their adult lives. 

When they are children:

Having a little money that is theirs without strings attached teaches children how to live with their own money decisions. Tying in money with chores, something they need to work at, develops a different perspective on money.  Learning to set aside a fixed percentage in a savings account will begin to teach banking skills and the impact of interest rates. When they're a little older, opening a brokerage account to buy fractional shares of companies they like will introduce them to investing concepts.

When they are teens:

It’s important, as teenagers transition to independence, to get them started with a sound financial foundation by teaching budgeting, saving, expense tracking, and being mindful of their spending habits and unnecessary expenses. 

The joys of that first job

One way to help them become mindful of their spending habits is to encourage them to seek part-time employment. When Wendy’s son got his first job at age 16, he got the experience of budgeting for savings and personal expenses and even making an initial contribution to a Custodial Roth IRA. Additionally, he got to fill out a W-4 form and his first federal tax return, giving him early, first-hand experience of professional life. 

Debit and credit cards

The teen years can be a good time for your child to learn about debits from a bank account. Wendy opened a joint checking account with her son that included a debit card when he turned 15, so that he could learn about managing his finances, as well as the fact that many locations like concert venues, sports arenas, and small businesses are now cashless. Not only did this allow him to experience independence by going to these locations by himself or with friends, but it also helped give him hands-on experience in transacting and managing his money.   A credit card, with a small spending limit, on a parent’s account teaches financial responsibility and credit history. Note that any damaging behaviors by the child can negatively impact the parent’s credit score.

Learning about loans

Another important lesson to teach is the financial benefit of paying off a credit card balance each month, as credit card debt is a high-interest rate loan. Teach teens how to monitor their credit card history by checking their free Experian credit report anytime or get free weekly copies from all three consumer credit bureaus at AnnualCreditReport.com. Over time they can track their FICO score, which is a credit score that impacts creditworthiness for loans and other financial products. In general, a higher FICO score results in a better chance of loan approval, with perhaps a lower interest rate, which they may need in adulthood.

Financial Literacy Tips:

• Now that many places only accept cashless transactions, your children may need a debit or credit card sooner than you thought. But this will give them hands-on experience in transacting and managing their money.

• You can open a Custodial Roth IRA account for a minor as long as they have reportable earned income (taxable earnings/wages). The account is owned by the minor but controlled by an adult until the minor reaches legal adulthood. Not only will your child start learning about investing for retirement, but they will also get a great early start on their nest egg!

Given the high cost of higher education, it is important to begin investing in those expenses when children are very young. An equally important opportunity is to teach children and teens personal finance lessons that will form an important base for their lifelong financial decisions and even decisions about higher education and career planning.