I have two boys, ages 19 and 21. Although they may have picked up some good money habits by osmosis, I have been guilty of not formally and intentionally teaching them how to manage their money successfully. Recently, my 21 year-old son, Max, had extra funds from chef jobs over the years plus a generous college gift from grandma. He asked me to just “put it in an account.” Since he didn’t need an upfront tax deduction, I put $5,500 (the maximum allowable) into a Roth IRA and for months he never opened a statement nor asked me anything about it. I decided it was time for some formal financial education.
Max and I scheduled a dinner date so I could educate him about his Roth IRA. I also wanted to prepare him for the additional living expenses he should expect once he graduates from the Culinary Institute of America and joins the rest of us in the real world. He needed to know that Mom and Dad do not provide phone service, car insurance and medical insurance for the rest of time!
First, I showed him the inflation, equities, and fixed income chart from 1926 to today, explaining each category in relation to historical events and the corresponding impact on investment accounts.
Second, I told him about his Roth IRA and explained the value of not paying taxes on the gains. Tax FREE is not associated with many things so it’s a great thing when you can take advantage of it. I let him know the principal (the amount he contributed) is always available to him penalty and tax free, regardless of his age. Only the gains are subject to a 10% penalty and taxation if taken out prior to the age of 59 ½. This may come in handy when he wants to buy a home. I showed him how his money is invested and explained how market volatility can increase and decrease the value of his account.
Third, I reiterated the speech he has already heard a thousand times. Don’t ever pay interest on the credit card; pay it off weekly so the amount you owe doesn’t increase. Credit card debt = BAD debt. Recently, Max received a job offer at a three-star Michelin restaurant in San Francisco and decided to live in close proximity to his work. I feel badly for him about the high rent he is sure to pay but reminded myself that these are his choices. So, I had him detail out his projected expenses so he has a clear understanding of his budget.
And last, I picked up the check. Mom and Dad are still good for a free meal!