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10 Ways to Help Your Kid Build a Lifetime
Emergency Fund
One of the most effective financial tools you can give a
child is an appreciation for an emergency fund and the advice on
how to build it themselves.
An emergency fund should contain 3-6 months worth of money to
cover living expenses — its main focus should cover all loss of
income, not just a car payment or a refrigerator repair. With
parents losing jobs and college expenses continuing to grow, the
younger you can get a person started, the better. Some advice:
1. Start by encouraging them to save something, no matter
how small the amount. Even if it's a few cents out of an
allowance, a teenager should be encouraged to set up a separate
savings or checking account — someplace not easy to access —
where they can house the money. Interest-bearing accounts are
better. For young children, this is why piggy banks work so
well. It's about setting goals and knowing where the money is.
2. Help them develop a balance between treats and
sacrifices. Financial independence requires a balance of
risk and reward. Life can't be all about building reserves, so
tell the teen when they hit a certain level for the fund — maybe
a midpoint toward the three-month mark — they can treat
themselves to clothes or an electronic device. After the
purchase, they go right back to saving.
3. Encourage them to direct all change into the emergency
fund. No matter how old or young the child, it's a good idea
to take non-essential funds and direct them toward the emergency
fund. Change is a great way to get started.
4. Set an example. Can your child see you saving? Do
you physically set aside money and talk about goals for that
money? Your child hears all of this. While parents can't be
perfect, think about the money behaviors you're demonstrating in
front of the kids, and try to make them positive.
5. Keep them away from credit as long as possible.
It's one thing for a teenager to use their parents' credit card
while they're still living at home. It's quite another when they
get their first taste of freedom hundreds of miles away. Parents
may co-sign the student's credit card but keep it in the
student's name. That way, parents will know when financial
missteps occur; this will be a strong incentive for the student
to keep his credit rating clean for the next four years.
6. Set up money meetings. Whether the child is living
at home or off at school, it makes sense for the parent and
child to have a few meetings during the year to talk about the
range of money issues the child is facing, and during that time,
the emergency fund can be up for inspection and discussion.
7. Make them set up a real budget. Budgeting comes
with saving. Young kids can do their first budget on paper — they can track what they spend and save over a month or two and
then establish what comfortable amounts for both will be.
Teenagers and prospective college students might find it useful
to have personal finance software to track their everyday
expenses, though they should make sure both the computer and the
passwords necessary to access their program are secure. Again,
review these details during your money meetings.
8. Get them interested in better-paying, safe savings
vehicles. At some point, the piggy bank's got to go. An
emergency fund can eventually gravitate to other
interest-bearing accounts that might pay more, but only as long
as the money stays liquid. If the emergency fund is healthy,
it's also wise for parents to talk to their children about
setting up their first IRAs to get a jump on retirement planning
and considerable tax savings.
9. Remind them that today's emergency fund may not fit
next year's needs. An emergency fund will almost always need
to expand in size as the person ages. More years, more expenses,
more emergencies — make time to convince your child that
emergency funds should change with life circumstances.
10. Train them to start saving tax refunds. If Uncle
Sam kicks back a few bucks, then by all means, put it in the
emergency fund or other savings vehicles.
January 2010 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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