In this Motley Fool Answers video segment, Alison Southwick and Robert Brokamp are joined by personal finance guru, journalist, and author Beth Kobliner, whose most recent best-seller is Make Your Kid A Money Genius (Even If You're Not): A Parents' Guide for Kids 3 to 23. It offers a raft of straightforward advice for teaching your children the skills and habits that will lead them to lifelong financial stability. But since one podcast can't sum up a whole book (guess you may have to buy it), they'll focus on one fundamental concept: how to get your children into the habit of saving.
For high schoolers, Kobliner has a couple of suggestions. The first: Start them saving for the distant future with a Roth IRA. (No, seriously. Hear her out.) The second: Recognize the value of letting them have a job, and of having some skin in the game on their college costs. As for undergrads and recent grads, spending comes to the fore, and credit cards become common. And that means they need to internalize one key fact: There's virtually nothing they can do with their cash that has the guaranteed return on investment of paying down high-interest credit card debt fast.
A full transcript follows the video.
This video was recorded on Sept. 12, 2017.
Alison Southwick: The next step is high schoolers.
Beth Kobliner: Right. I have a few here. I would say having your kid open a Roth IRA sounds nuts, right? High school [and a] Roth IRA? But if a kid has a summer job and if they're really saving money, [you could say], "You could open this thing, a Roth IRA." Say [your kid earns] $1,000 over the summer starting at age 16 to age 20 and never invests again. I mean, you know the math. If [your kid did] that, by the time your kid is ready to stop working at 65, he could easily have $200,000 in that account just by the money compounding.
So, I'd say start with a Roth IRA and even if your kid makes $1,000, as long as they earn $1,000 you could give them $1,000 to put into that Roth IRA. Make that, "Here's some seed money. I want you to start with this, but you can't touch it for many years." It can be kind of empowering for a young person, again.
Southwick: Very motivating if you're getting double your investment immediately thanks to Mom and Dad.
Robert Brokamp: Obviously someone in high school is getting close to college.
Brokamp: As I understand it, one of your beliefs is that kids actually should contribute a little bit to paying for their own college degrees.
Kobliner: Definitely. I mean, one nice thing about a Roth IRA is if you think you might get a little financial aid but the savings the kid has isn't really enough to make a huge difference. I have to say that when they look at the formula for how much money you have to contribute to college, when a kid has savings, that's counted more heavily than a parent's savings. So, by putting it in a Roth IRA, you're taking it out of the equation. They don't usually look at money in Roth IRAs.
Brokamp: You cited a study that indicated kids who had to do a little bit to pay for their own college degree actually had a higher GPA.
Kobliner: Exactly. And it's probably just the idea of having a little skin in the game. Just about a month ago my dad pulled out the sheet where he spoke to me about whether I was going to Queens College, which would have been basically free, or to Brown, if I got into Brown -- and other schools which I didn't get into.
And one thing I saw was I contributed every year $2,000 for four years. And I was like, "Wow! That's the equivalent of almost $10,000 today, adjusted for inflation." And so I remember very clearly working. It never was a deterrent. It actually was kind of fun in college. And we do know when you work in college, as long as your hours are under 20 hours per week, and as long as you have an on-campus job, that also results in a somewhat higher GPA than kids who don't work at all. So having your kids contribute, having them work in college is really a beneficial thing according to the research.
We do know that there's more pressure on kids with college and just more awareness of colleges. Kids are prepping for SAT courses. Boy, did my kids get surprised when they saw my SATs. They were like, "Mom! We thought you were smart."
Southwick: This was a different era. They also readjusted the formula, by the way.
Kobliner: There you go. That was the hard SAT. That's my story and I'm sticking to it. But I think that for kids, overall, using that summer ... It's hard to work during the school year, and studies do show if you work more than 10 hours a week in high school, you are probably decreasing your chances of graduating from high school. So more than 10 hours is kind of a cutoff point.
If a kid wants to work during school, it's great. Just keep it limited. But the summers of high school is a great time to really try to figure out how you can make some money. I remember I learned to make change when I worked at a diner as a hostess. I didn't know how, because I would take the number and subtract it, and my dad said to me, "No, calculus math honors girl. You have to round up. If a bill is $3.47, you say three more pennies make fifty cents, and then add fifty cents to that. That's how you give change. You don't try to subtract it in your head."
So practical skills like that -- people are paying, now, with debit cards and credit cards, but it's still good for kids to have practical, service-oriented skills that will last them a lifetime.
Southwick: The young adults in our lives. How can we help them understand saving?
Kobliner: I'd say the best way to save as a young adult is to pay off high rate credit card debt. Just that idea of paying off a credit card that's charging a rate, say, of 15% is the equivalent of earning 15% on your money after taxes.
So, talk to your young adults. Especially if they're living at home with you, try to encourage them to look at all their debts and pay off the high interest rate debt more quickly than maybe the student loans. They still have to make all their payments on time, and that's another important point, but when it comes to saving, paying off high rate debt is super important. I believe it's even more important than setting up the emergency cushion because you're digging yourself into a hole by continuing to pay high interest rates on credit cards.
So, imparting that information of paying off those high rate debts most quickly I think is a very valuable lesson to pass along that we certainly don't learn in school. I mean, nobody really tells you that, so I think that's an important one.