Kid’s Financial Strategies

i_strategiesKids-Financial-StrategiesIt’s never too early to begin teaching your kids the importance of wealth building.  The lessons about financial responsibility you impart to your children today will last a lifetime.


Distinguish Needs from Wants

Long before they understand the concepts of saving, investing or borrowing, children sense the power of spending money. Superficially, they see adults showing off their latest purchases or talking about the next door neighbor’s latest acquisitions.

An important lesson about money and finance involves differentiating between needs and wants. Clarifying this distinction is essential for developing good money management skills. Without this basic foundation, children may have trouble controlling their spending habits as adults and will never understand the difference between a luxury and a necessity.


Fund the 10% Solution

Instill in your children (first by you doing it) the importance of setting aside a portion of all that they earn and placing that money in a long-term investment account. Show them how one penny out of every dime or $1 out of every $10 can grow to a very large nest egg, particularly if they start young and contribute regularly (see Make Your Child a Millionaire and Deduct It, below).


Teach Savvy Consumerism

Comparison pricing, shopping at discount outlets and avoiding “hidden charges” should be taught by example. When your kids reach high school age, begin to teach them the Finances 4 Today Money Strategies which will help them learn how to become financial victors not victims.


Open a Bank Account Early

“What do you mean there’s no money in my account? I still have checks!” one teenager exclaimed. Once your children turn twelve or thirteen, help them open a checking or savings account at a local bank or credit union.

Teach them the basic skills of reconciling their statements and tracking their current balance. Show them how to use an ATM card or home computer to access their account.


Hire Your Kids-Make Them Millionaires-and Deduct It!

By starting a home-based business correctly, you are able to make more money, fund more retirement plans, control medical costs through Medical Savings Accounts (MSA’s), take additional tax deductions and pay your children tax-deductible wages.

Pay your child a salary from your incorporated business instead of an allowance. Their wages should be competitive with what you would pay another individual of the same skill level.

Paying your child a fair wage for work performed has three benefits.

  1. You are prepping your child for adulthood by teaching him or her that labor and investment, not entitlements, are the ways to generate wealth.
  2. You are allowing your child to produce “earned income,” which is a fancy IRS term that means you can create and contribute to a tax-friendly retirement account for them.
  3. Your child’s wages can be tax-free to the child while you receive a business deduction, whether or not your business is profitable.

To avoid income, Social Security and Medicare taxes, do not pay your child more than the standard deduction (currently $5,250 per year).

A special provision in the IRS tax code allows parents to hire their children (under the age of 18) in their unincorporated business, completely exempt from Social Security and FICA. Paying your kids no more than the standard deduction ($5,250 for non-investment “earned” income in 2006) will make their wages entirely tax-free!

Set up a payroll system to pay your child.

Simply put, don’t be informal in your record-keeping and payment methods. You will need to document and pay your child a fair wage for work performed. Paychecks must be issued at regular intervals. In order to survive the scrutiny of the IRS, you will need to pay your child just like you would pay any other non-related employee.

The process is simple. Have your child fill out forms W-4 and I-9 (Form I-9 is used to verify that the employee can legally work in the United States). Make sure your child claims “EXEMPT” on the W-4 and file both of these forms in your records. Be sure to provide the IRS and the child with a W-2 by the end of January of the following year.


Open and Fund a Roth IRA for Your Child

A Roth IRA is a wonderful creation of Congress that allows investment earnings to grow tax-deferred and eventually be withdrawn tax-free. In order to be tax-free, money in the Roth must be invested for five years and withdrawn no earlier than age 59 1/2. Additionally, investment earnings can be withdrawn early for certain higher education, health insurance and first-time home purchase expenses without penalty, but always subject to income tax.

In 2006, you can invest up to $4,000 or earned income (whichever is less) into a Roth IRA for your employed child as long as the earned income (W-2) is at least the amount of the contribution.


Tax Savings for the Business Owner

Along with helping your child build a secure retirement, you would be paying your child a wage which is tax-deductible to your business. For instance, if you are in the 28% tax bracket and you paid your child an average of $4,000 every year over a three year period through your unincorporated business, you could reduce your federal income taxes by $3,300 alone ($12,000 x 28%). Beyond that savings, you could fetch an additional $1,695 in self-employment taxes to boot!


It’s Never Too Late to Begin!

If your child is already a teenager, you can still make your kid a millionaire by their retirement with just five years of contributions!

For example, let’s say you invest just $3,000 per year for your child between the ages of 13 through 17 and then do not contribute another dollar after that. If the Roth earns a very conservative 11% per year (or more through a self directed tax lien IRA and/or Money Movement Strategy through a no-load mutual fund company), your child will have reached millionaire status, $1,094,000, by the time he or she reaches age 56. Best of all, the money will be entirely, 100% tax free!



-See the JumpStart Coalition for Personal Financial Literacy, a national non-profit organization based in Washington D.C. ( This organization, which we strongly support, has joined forces to improve the personal financial literacy among children and young adults.

-Go to for the Teen Guide to Owning a Small Business. Some excellent guidance here.

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