Personal Finance

How to make sure kids don't waste their holiday cash

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Key Points
  • One way to feel better about your financial blunders is to help your children avoid the same ones.
  • The start of the new year is a good time to teach your kids about the power of compound interest and the dangers of debt.
  • Here's how to put those lessons into action.
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Don't underestimate that $20 bill your child got in a holiday card this year. Put to use, it can teach them a lot.

The start of the new year – and this round, new decade – is a good time to teach your kids about the power of compound interest and the dangers of debt. Experts say the best way to make these lessons stick is to put them into action.

Don't worry about beginning too early. Some of our financial behaviors are formed by the time we're 7 years old, according to a study by researchers at the University of Cambridge.

Here are some steps to help your child be financially savvy and secure in the future.

Open a 529 plan

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The investment accounts, which are named after Section 529 of the Internal Revenue Code, are offered through states to encourage people to save for college.

The main benefit: withdrawals put toward qualifying education expenses are tax-free.

The advantages of the accounts are hard to overstate. Studies show that children with the savings plans are more likely to attend college.

And if you start to contribute to a plan at your child's birth, about a third of your savings goal could come from investment earnings alone, according to calculations by Mark Kantrowitz, publisher of SavingForCollege.com.

You'll need to open a separate 529 account for each child, Kantrowitz said.

Aim to save $250 a month for an in-state public college, he said, or $550 a month for a private college.

It might be hard to get your 8-year-old excited about such a far-off goal. "Delayed gratification is a difficult concept for adults, much less kids," Kantrowitz said.

Still, explain to them that you're saving to help them fulfill their dreams, whether that's to become an astronaut or to save the planet.

Introduce them to credit

If you want to start building your child's credit history, you can make him or her an authorized user on your card.

"Handled well, it can really give the kid a leg up, credit-wise," said Matt Schulz, chief industry analyst at Comparecards.com.

Different banks and credit card companies have different minimum ages for authorized users, Schulz said. "Parents should be sure to check that before setting their kid up," he said.

Engaging your child with your credit card use can be a good chance to teach them about the issues with interest and the importance of not carrying a balance.

You should also keep tabs on your child's credit report. Kids can be especially vulnerable to identity theft, Schulz said, because criminals know their records are rarely checked.

"It's an unfortunate reality today that a parents' regular financial routine should probably also include credit checks for their minor children," he said.

Saving and investing

Unruly Splats is a start-up teaching kids to code through play.
Source: Unruly Splats

It's never too early to start teaching young children about investing, said Sara Rathner, a personal finance expert at Nerdwallet.

"Parents can set up an investment account online in 15 minutes or less," Rathner said.

You have two options: a brokerage account or individual retirement account. The former will be in your name until your child reaches 18 or 21, depending on your state law.

The latter can be in your child's name as long as they have earned income.

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Why this 'rule' about credit card use could be costing you
Credit card debt is worse for those with high income

For young people, a Roth IRA, as opposed to a traditional IRA, is often a good call because you can typically tap into the account at any time without being dinged with penalties and taxes.

It's also a good idea to set up a traditional savings and checking account for your child, so they can monitor their money online, practice using ATMs and writing checks.

Engage your child in your own saving and investing, Rathner said.

"If you make a big purchase, tell your kids how long it took you to save," she said.

What big things might they like to buy?

"Do the math on how much they need to save each day to afford those items," she said.