In a recent survey of Generation Z (ages 13 to 22), 39 percent of teens and young adults said they expect to receive an inheritance and therefore don't need to worry about saving for retirement! However, only 16 percent of Gen Z parents expect to provide an inheritance – and there's no guarantee that an inheritance would be sufficient to replace retirement savings.
This disconnect between expectation and reality highlights the need for financial literacy among young people. Teaching children about finances not only may help them handle their own financial matters but could encourage academic engagement and pursuit of higher education.
Here are some steps to help develop your children's financial knowledge.
• Advocate saving. Sixty-three percent of kids 18 and under have a savings account, and almost three out of four accounts were opened before the kids were three. Encourage your children to set aside a portion of money they receive from an allowance, gift, or job. Talk about goals that require a financial commitment, such as a car, college, and travel. As an added incentive, consider matching the funds they save for worthy purposes.
• Show them the numbers. Use an online calculator to demonstrate the concept of long-term investing and the power of compound interest. Your children may be amazed to see how fast invested funds can accumulate.
• Let them practice. About half of parents give their children a regular allowance. Let older teens become responsible for more of their own costs (such as clothing, activities, and car expenses). Running out of funds could require them to think about their spending choices and consider a budget.
• Discuss the basics. By the time students graduate from high school, they should at least understand these basic concepts: budgeting, saving, insurance, credit, the cost of debt, and investing. Of course, some lessons can be learned earlier.
• Have fun. Check out online games, quizzes, and mobile apps that teach financial principles. Some schools offer "real life" classroom exercises such as business and stock market simulations.
If an older child has a job with earnings, you could open a Roth IRA in the child's name to help him or her save for retirement or college. A child can contribute up to $5,500 of earned income to a Roth IRA in 2013. Roth IRA assets accumulate tax deferred, and contributions can be withdrawn tax-free and penalty-free at any time for any reason.
Roth IRA earnings may be withdrawn without federal income tax liability or penalties if used to pay qualified higher-education expenses, as well as for certain other purposes. In most cases, however, Roth IRA distributions must meet the five-year holding requirement and take place after age 59½ to qualify for a tax-free and penalty-free withdrawal of earnings.
Finances may seem complicated, but a little education could go a long way. Do yourself and your children a favor by helping them develop financial awareness.
(Charles Sims Jr. is president/ CEO of The Sims Financial Group. Contact him at 901-682-2410 or visit www.SimsFinancialGroup.com.)