Dear Readers, Have you heard of National Grandparents Day? While it may not be widely known or celebrated, it's officially designated as the first Sunday after Labor Day. I like the idea because, to me, grandparents play a very important part in our lives. They not only offer added emotional support, they can also give practical help. I think that's especially true when it comes to finances and financial education.
I'm a strong believer in one generation helping the other — in both big and small ways. When I was young, I was very close to my grandparents; in fact, I considered my grandmother to be my best friend. My grandfather was a successful engineer, but he and my grandmother lived very simply so that they could help put their grandkids (and others) through college. On the other end of the spectrum, a colleague of mine recounts how her grandmother, who didn't have a lot of money, nonetheless sent every grandchild birthday and holiday cards with a small check and the note "just a thought."
Giving money is one way to lend a hand. But, more importantly, I think grandparents can make an even bigger contribution by helping their grandchildren learn to be responsible about money. So in honor of Grandparents Day, I want to share my thoughts on ways grandparents can help their grandkids develop good financial habits.
Seven ways to share your financial know-how
—Take your grandchild to the bank. Think of this as a financial field trip where you can teach some of the nuts and bolts of banking such as the difference between a checking and a savings account, what a teller does and how an ATM works. It's a great opportunity to reinforce the idea with younger kids that an ATM isn't just a money machine but is actually connected to an account that you have to put money into! For older kids, it's a good time to bring up responsible use of a debit card.
—Help open a savings account. A savings account is a good first account experience. It's something tangible that even a small child can understand. It's also an ideal opportunity to talk about interest and how it compounds.
—Offer to match savings. Once the account is opened, help motivate your grandchild to save. Suggest the idea of saving a portion of gifts, allowance or earnings from a part-time job for a specific goal. As an extra motivation, you might consider matching their savings up to a point.
—Encourage a part-time or summer job. As your grandkids get old enough to work, give them a boost by helping them look for a job and prepare for an interview. Once they're getting a paycheck, talk to them about withholding and basic income taxes, and help them decide how they want to spend — and save — their earnings.
—Introduce the basics of investing. Once your grandkids are teens, you can introduce them to investing. Kids often are most interested in buying stock of a company they can identify with, which is fine, but also explain the necessity to diversify their portfolio. Once you have selected investments that fit your needs, make a point to monitor them with your grandkids, and share the importance of doing so on a regular basis. This will also give you an opportunity to educate them about the risks associated with your investments, and how they should be prepared to handle market volatility.
—Introduce the idea of charitable giving. Good money habits aren't only about earning and saving, they're also about sharing. Discuss the charities you support, whether through giving of your time or money. Ask your grandkids which organizations they might like to support, such as a food bank or animal shelter. Help them participate in some way or contribute a portion of their savings.
—Talk about your own attitudes toward money. People are often hesitant to talk about money, but I think being open about how you handle money is a great way to pass on good habits. How do you handle credit cards? What's your savings plan? Do you invest? These are all topics you can bring up as appropriate to your grandkids' ages.
Practical ways to share your wealth
If you're in the financial position to give significant monetary gifts, there are a couple of ways to do it that make practical sense for both you and your grandkids.
You can currently give each grandchild up to $14,000 (or as a couple, up to $28,000) annually gift tax-free. If that's an option, I'd first discuss it with the parents and perhaps open a custodial account in the name of the child. Then you could use this account as a teaching tool to introduce the basics of investing. It could also be a way to keep the money conversations going as you and your grandchild review the account together.
Contributing to a 529 college savings plan is another great gift that can be a boost to your grandkids education savings — and a bit of relief for their parents. Earnings grow tax-free, and withdrawals aren't taxed as long as the money is used for qualified higher education expenses. An individual can contribute $70,000 ($140,000 for a married couple) in a single five-year period without triggering gift taxes.
Another plus is that there's no penalty for transferring unused assets to other family members. Say one grandchild was college bound, but the other wasn't, the 529 assets could be shifted to the one headed for college.
A commitment to share your values
Grandparents are in a unique position to show love and support in so many ways. Whether it's something practical like money skills or your philosophy on how to lead a happy and successful life, sharing your values — both in word and by example — can be the greatest gift of all. And it will be remembered for a lifetime. I know from experience.
Before opening and investing in a 529 plan, carefully consider the information contained in the 529's official statement, including investment objectives, risks, charges, and expenses. You can request an official statement from the specific plan sponsor. Please read it carefully before investing.
As with any investment, it's possible to lose money by investing in a 529 plan. Additionally, by investing in a 529 plan outside your state, you may lose tax benefits offered by your own state's plan.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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