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Christine Benz: Hi, I'm Christine Benz from Morningstar.com. Many parents wrestle with how to raise kids who are financially fit. Joining me to share some financial guidance for kids at various life stages is Tim Steffen; he's director of financial planning for Baird.

Tim, thank you so much for being here.

Tim Steffen: Thanks as always.

Benz: Tim, let's talk about this. In your paper you looked at financial guidance for families with kids at various life stages. You started out with the really young ones. Let's talk about the key points for parents who have young children. You say the starting point in this might seem like common sense--just model good behavior.

Steffen: So, we're talking about these pre-high school kids right now who are really just kind of learning what a dollar is, that kind of thing. So absolutely, set a good example for your kids. You may think that kids don't know what's going on, but they are more aware than what parents think. If parents are struggling to make ends meet or they're being frivolous with money, kids will pick on that. If that's what they learn from you, that's what they are going to do when they are older. So, set a good example for your kids at the outset. Then there are ways to teach them specifics as they are getting through those early years.

Benz: OK. So, you say even for young kids teach them about the three main things they can do with their cash--if they get gifts for their birthdays or whatever it might be.

Steffen: Typically, you are talking about birthday gifts, allowances, those kinds of things. So, you've got three things they could do, the three general buckets which would be spend it themselves, save it, or give it charity or something like that, give it away. So, young kids being what they are, they are going to want to spend it. But maybe you can encourage them to build up that savings instead and save for something larger rather than that impulse purchase for them, because they've got a couple of extra bucks in their pocket at the store. Then every once in a while, whether it's through their church or through school, there will be an opportunity for a fundraiser. They may say they want to go throw a couple of bucks in the bucket for one of their classmates who is having an issue or something like that. So, there could be some good financial habits built right away.

Benz: And how about matching programs for parents. Do you like that idea even for young kids?

Steffen: It is a good idea. It gives the kids a little bit extra incentive, just like we say, if you are working, take advantage of those 401(k) matches that your employer gives you. Same for the kids--if you tell them if you put money away, I'm going to match it, they are going to more likely to do it.

Benz: How about allowances? I know a lot of families' wrestle with this, whether to give allowances, what to give allowances for? Where do you come down on that question?

Steffen: That's a difficult one. In general I like the idea of allowances, but I understand why it's not a universal thing. One of the big questions or two big questions would be under what circumstances, meaning do they have to do something to earn it or is it just kind of regular paycheck, so to speak. And there's pros and cons to both sides of that. The other part of it is how much. I tend to think that younger kids are going to be just as excited over a few quarters, even a buck. Then as they get a little bit older and maybe you increase it a little bit, just like a normal pay would be. Regardless of how much or how often, under what circumstances, the key thing you are trying to teach the kids now that you've got this money what do you do with it.

Benz: Exactly.

Steffen: You get frivolous with it or do you try to build up something with it.

Benz: Right. And you say it's valuable to not go to the extreme: we are going to bank every dollar that you get. To give kids a chance to enjoy the fruits of their labors if they are earning an allowance or getting a gift.

Steffen: You get worried about kids being too frivolous with the money and spending it on every little whim. The other extreme can be just as dangerous in some cases, where they become so afraid to spend their money that they just hoard it, and they don't develop good spending habits for later in life. So, you want to try to find that happy medium and let the kids enjoy the fact that they earned a little money and go out and do something nice for themselves once in a while.

Benz: OK. The next life stage--kids in high school sometimes have jobs. So, they might be getting a little bit of income. Let's talk about that, because sometimes, depending on the job, the earnings can be significant for a high school kid.

Steffen: So, yeah when the child gets their first paycheck, the obvious first lesson there is, let's talk about taxes. The reality of life--death and taxes, those are the two big ones. So, show them what their check stub is, explain to them what withholding is, what that evil FICA thing is and Medicare and how that all works. And the fact that they may be able to get some of that back. If you really want to get into it you can even talk a little bit about, this FICA you are paying, that's going to pay for Social Security when you are much older and later in life. So, if you want to go down that path with them. But it's a good opportunity to teach them about savings and maybe even lead into some retirement savings discussions for them later on.

Benz: Well let's talk about that. Is it too early to start thinking about, well could you do some sort of Roth IRA for the child?

Steffen: It's probably too early for the kid to really understand the advantage of that, but that doesn't mean its too early to start funding it. It may be a challenge to get your child to put some of the--they are not making big dollars. They've got some things they want to do: prom, homecoming, all those kinds of things could get expensive. But encourage them to maybe put a little of their money away or maybe even you do it on their behalf. So even though the child may not put in their own earnings into the account, you as a parent certainly can. It's a gift, so keep that in mind, along with your other gifting strategies you may have with your child. But even if you are funding a little bit of money in the account for them. You can teach your child, look wow, look how this is growing. Maybe if I put my own money in there too it would really start to grow.

Benz: And the same is true for grandparents, aunts, and uncles they could also help fund that account.

Steffen: Absolutely. As long as a child has earned income, they can fund an IRA or a Roth IRA. I'd say at that age you are probably better off with a Roth IRA. A deduction for traditional IRA is not going to do them any good. So, you'd want to look at a Roth for those kids, and yeah, anybody can fund it as long as the child has earned income.

Benz: OK. College funding obviously, a huge topic for parents, especially parents with high school kids.

Steffen: Yeah, absolutely.

Benz: Where do you come down on this question of whether kids should have skin in the game? Whether they should be participating in the college savings alongside the parents?

Steffen: The reality is college is so expensive that kids can't pay it on their own. The parents who say it's all on the kid, I understand where they are coming from, but unless you really want to saddle that child with a lot of debt it's going to be a challenge for them to pay it on their own. It almost has to be a joint effort between parents and child. Even grandparents are getting more into that these days, those who can afford to do it. So, there is all resources there. One of the things I have seen most commonly is the parents handle the big bills, the kids handle day-to-day expenses. So, you are spending money at school, that's on you. If you want to get a part-time job or save from your work income, whatever it might be, that's kind of on you.

Benz: OK. College years, some other things can come into play. You say one of the big ones is really teaching good habits about safeguarding your financial information. Let's talk about that.

Steffen: So, you are going off to college, you are in a whole new environment with a lot of people you've never met before.

Benz: Might have your first checking account or something like that.

Steffen: Could be or ATM card or something like that. You are getting a lot of documents in the mail--transcripts, tuition bills, that type of stuff might be coming to you with a lot of personally identifiable information on there. Safeguard that. I have talked to many of the millennials and younger who maybe aren't as aware of some of the risks of identity theft that some who maybe been through it would better understand. So, remind them to safeguard that information, don't leave documents lying around, whatever it might be. Don't leave a backpack sitting around where it can easily be stolen or rifled through. So just good financial habits in there. Don't leave your bank account up on your computer when you step away. Really take good steps to safeguard that information.

Benz: Public Wi-Fi, that's another one.

Steffen: Absolutely.

Benz: OK. Another thing to think about, if the student is taking loans to help pay for college. You say it's important to really think through the implications of any loans that you are taking out. Think about your career path and make sure that those things are kind of in sync, that you are not spending way more on an education then you will possibly get in salary.

Steffen: It may sound exciting to go to that small liberal arts school that's very prestigious but also very expensive. But think about what you are going to do when you come out of that school, and are you going to be able to pay off the loans? It's not just what happens during those four years, you've got a long time perhaps to pay off those afterwards, and it can be very expensive. So, make sure that the debt you are incurring is appropriate given what you may earn coming out of school. What's the return on your investment going to be? So, you don't want to get yourself in too deep a hole right out of college.

Benz: So, talking to your kids about those decisions that affect ROI. OK. Now we are out of college, so let's talk about young adults embarking on their first job, some key things that they should know.

Steffen: Well, now you are getting into things like, they've seen those first paychecks. They have gone through the tax discussions, you had with them when they were in high school, maybe in college. Now they are seeing things like health insurance. All the different benefit programs they need pay into. And even saving money into a retirement plan. So they've got all these other options that they have never had before. They may need help understanding, what is the right type of health insurance? Do I do a standard health insurance or do a high-deductible plan with health savings account? All those things they have never thought about before.

Benz: Or do I stay on mom and dad's plan. That's a common one.

Steffen: Or stay, absolutely. That may be their first choice. Parents have to have that conversation with them. So, understanding the different benefit options for them and the importance of having insurance. Saving for retirement, understanding that employers, in many cases, will match what you put in there up to a certain dollar amount. So, at a minimum make sure you are picking up that, that's kind of free money. But also balancing--now you've got rent, you've got your groceries. You've got maybe student loans to pay off. Parents may help with a few of the other bills like health insurance like you said, maybe continuing to pay the cellphone bill, some of those types of things. But eventually the kids are going to have get on their own two feet and start learning to pay some of these themselves. So, budgeting and having a good idea of what their expenses are relative to their income.

Benz: OK, Tim important topic, helpful tips. Thank you for being here.

Steffen: You are welcome.

Benz: Thanks for watching I'm Christine Benz from Morningstar.com.

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