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FAMILY & MONEY

1. When's a good age to open a savings account for my child?

Your child can start learning to save at any age. Consider opening a savings account for your child as soon as they save more in their piggy bank than you feel comfortable letting them have easy access to.

A good way to introduce your child to banks or credit unions is to explain that we use these institutions to keep our money safe and to receive interest. Even younger children will understand the safety and security part, but you might want to save a detailed explanation of compounding interest, or how our banking system works, until they’re able to get it.

If your child asks why banks pay us for keeping our money safe, you can explain simply that banks and credit unions use our savings to make loans to other people. They charge those customers a little extra when they pay the money back, and we get a portion of that.

You can also explain that the deposits we put into a bank or credit union are insured through the federal government.

2. How can I explain to my children where money comes from?

When you talk to a child that's three to five years old, you can explain that the money your family spends and saves comes from working.

This may be hard for younger children to grasp, especially these days when most paychecks are deposited directly from your employer and cash comes out of the ATM.

Describe the jobs you, your spouse and others in your family go to every day. Walk through the neighborhood or town and point out people working, like the bus driver or police officer.

You may also want to explain that some people start their own businesses like stores or restaurants. They make money through profit, by buying goods or resources at one price and charging customers enough to cover their costs, time, and a return on their investment. You could also encourage your children to earn their own money by setting up a lemonade or cookie stand.

If you have older children who are looking for more literal answers, the Bureau of Engraving and Printing prints paper currency and the U.S. Mint produces our coins. The Federal Reserve regional banks distribute both.

3. What's a good way to get my child in the habit of saving?

First talk to your children about needs versus wants. Once children understand that needs come first and that sometimes we have to wait for the things we want, it gives them a foundation to see the value in saving. Consider these other tips for children of all ages:

For preschoolers

There are big lessons wrapped up in saving, including understanding the difference between needs versus wants, understanding that needs come first, and sometimes we have to wait for those things we want. Explain that you and your family need food, clothing, a place to live and transportation to get to work. Most everything else is a want. When you go shopping, point out the things that are needs and those that are wants.

You can teach delayed gratification – which you sometimes have to wait for those things you want – by using teachable moments, like when your child is standing in line for a turn on the swings, or looking forward to a birthday or holiday.

A common method to get children in the habit of saving is to use three jars or cans, one labeled “saving,” one for “spending,” and one for “giving.” Each time the child gets money, a little should go into each.

When your child sees a toy they want, don’t automatically say “no.” Have the child look at the price. Then, let them use the money in their spending jar, or save for it using their saving jar.

For middle schoolers

Encourage middle schoolers to save a dime for every dollar they receive. Help them start a savings account at the local bank, or credit union, or online. Then help them to set a savings goal. It could be the amount needed for a new gaming system, a bike, or car when they turn 16. Whatever they choose, it should be meaningful to them.

To reinforce their savings habit, go to the bank at least two to three times a year with your children to deposit their savings into their accounts, and look at how much bigger the balance is on each visit.

You might also consider a “matching plan” to help incentivize your child’s savings. For example, you could put in 25 cents for every dollar your child saves.

For high schoolers

Once teens reach their freshman and sophomore years, they may be starting to work part-time jobs, which mean more money to save – or more temptation to spend. Help them to focus on attaining their goals, rather than on restricting their spending. For example, many teens’ biggest goal might be saving for a car. Show them the math – how soon they could reach their goal if they saved a specific amount each paycheck or month.

You can also explain that the more they save for big ticket purchases like a car the more they can reduce the amount they have to finance and the amount of future income that would have to go to loans and payments. Look at online calculators to run different down payment and monthly payment scenarios.

 

4. Are there activities I could use to teach my child about needs and wants?

When trying to teach your children about needs versus wants, consider pointing out items like food and clothing as you shop and ask them to tell you which category each fits in to. Understanding the difference between needs and wants is a bedrock concept that can lead to a lifetime of better financial decision making.

Needs include the basic things we need to survive – food, clothing, and shelter. But we also need to earn a living so we can pay for those basic needs and things we want. So, we need reliable transportation and the tools and resources necessary to do our jobs well. We also need to build and protect our assets so we can keep meeting our needs in the future – this includes emergency savings and insurance.

Wants are all the upgrades and other things that would be nice to have but aren’t necessary for living, earning and protecting what we have. Knowing the difference is the key to purchasing decisions, and the payment choices that young people will one day face.

So here are some activities you can try with your children:

  • When you are out shopping, point out essentials such as food and clothing, and ask your child to describe items that she may want but are optional.
  • Talk about how your family decides what to buy and what to pass up. Which is more important: Buying cookies or fresh fruit? Soda or milk?
  • Draw a circle and divide it into sections for food, rent or house payments, clothes, and "optional items," to show that there is a finite amount of money to spend.

 

5. Will the age when I claim my Social Security retirement benefits affect how much I get?

The monthly amount of your Social Security retirement benefits will depend on the age at which you choose to claim your benefits. The later you claim the more you get each month. You are eligible to claim your Social Security retirement benefits without any reduction at what the Social Security Administration calls the full retirement age. For people born after 1942, the full retirement age ranges from 66 to 67, depending on the year you were born.

  • Your benefit increases each month that you wait after your full retirement age, up to age 70. By claiming after your full retirement age, you can permanently increase your monthly benefit by as much as 32 percent. At age 70, you get the maximum possible monthly benefit; there is no additional benefit to be gained by waiting to claim after age 70.
  • Your benefit is reduced for each month that you claim your benefit before your full retirement age. You can claim your benefit as early as age 62, but this reduces your monthly benefit by as much as 30 percent. At age 62, you get the lowest possible monthly benefit.

FACT: Monthly payments are 75 percent greater for those who collect at age 70 compared to those who claim early at 62. For example, for someone with an expected monthly benefit of $1,000 at full retirement age, the expected monthly benefit at age 62 is $750 while the expected monthly benefit at age 70 is $1,320.

6. When should I start collecting my Social Security retirement benefits?

When you should start collecting Social Security retirement benefits depends on your specific situation. You are eligible to claim Social Security retirement benefits without any reduction at what the Social Security Administration calls the full retirement age. For people born after 1942, full retirement age ranges from 66 to 67, depending on the year you were born. This means you can:

  • Claim your benefits after your full retirement age and receive an increased monthly benefit. Your benefit increases with each month that you wait to claim your benefit after reaching full retirement age. At age 70, you get the maximum monthly possible benefit; there is no additional benefit to be gained by waiting to claim after age 70. Claiming after the full retirement age and getting an increased benefit may make sense if you are healthy, want to work longer, and want the highest possible monthly Social Security benefit.

 

  • Claim your benefits before your full retirement age and receive a reduced monthly benefit. Your benefit is reduced for each month that you claim your benefit before you reach full retirement age. At age 62, you will get the lowest possible monthly benefit. Claiming before your full retirement age and getting a reduced benefit may make sense if you are in poor health or need the income owing to unemployment or a disability.

The amount you receive from Social Security is a one-time choice. Your payment typically doesn’t change during your retirement, other than cost-of-living adjustments. This means that if you claim a reduced benefit, you receive the reduced amount permanently. And this decision applies not only to your own Social Security benefit, but the payments to others who receive benefits based on your work history, like your surviving spouse and dependent children.

7. My son just started his first part-time job. Can he open an IRA?

Your son or daughter can open an IRA as soon as he or she has earned income.

There are two types of IRAs – the Roth IRA and the traditional tax deductible IRA. The basic difference is that contributions to Roth IRAs are not tax deductible, but you can withdraw your savings in retirement tax-free. With traditional IRAs, you can deduct your contributions in the years you make them, but when you make withdrawals in retirement, the money will be taxed at your regular income tax rate.

The better option for young people earning part-time incomes is likely going to be the Roth. That’s because:

  • Young workers are probably in the lowest tax bracket and would likely pay a higher tax rate later in life.
  • The future taxes they would pay on their earnings – after 40 or 50 years’ of growth – is going to be more significant than any tax break they’d get today.

Opening an IRA is also a great opportunity to talk to your son about the time value of saving. That is, the sooner you start saving, the easier it is to reach your goals.