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Middle Years (7-12)
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 The good news: There are various options available to young people that can provide a good return on investment, provide them and their parents with tax benefits, and minimize their investment risks. The bad news: It can be a bit overwhelming for a non-MBA graduate to decide which options are the best for someone just starting out in the world of personal finance. Understanding the various vehicles for college savings is very important. Two of the most popular are the 529 Plan and the Coverdell Education Savings Account. Both of these accounts provide a convenient way to save and allow for your investment to grow free from federal taxes – and be state tax-free, if you utilize your state’s plan. Also, with both of these options, families can change the beneficiary without penalty. With a 529, the donor controls the funds, the limit of contributions is very high, there is no age limit to beneficiaries and anyone can contribute to the account. An advantage of the Coverdell Account is that the money can be used to pay for school from kindergarten through college, and the investment options are more flexible. However, the investment amount is more limited with the Coverdell option: $2,000 maximum per year. “I recommend that parents start saving for their child’s education as soon as he or she is born,” says Joe Ciccariello, head of Fidelity's College Savings. “Some parents even start before the child is born and put the account in their own name, and then change the beneficiary to the child.” As everyone knows, paying for your child’s higher education is continuing to rise.  “The cost of college has increased so much over the past few years that even those who have prepared well are not ready,” says Deborah Fox, founder of Fox College Funding. The planning is crucial, and it comes in two stages: saving and distribution. Parents are familiar with the need to save, but they need to understand about reducing education costs when they start paying the bills. There are various strategies, such as scholarships, financial aid and tax credits. Tax credits, such as the American Opportunity Tax Credit and the Lifetime Learning Credit, are great options to help limit college costs. An interest-bearing savings account is an excellent option for young people. This type of account is not meant for everyday use, because there can be limits to accessing your funds. “I absolutely recommend a savings account for young people,” says Jerry Clements, Certified Financial Planner for Ameriprise Financial Services, in Irvine. “The sooner their parents help them, the better. I also highly recommend an allowance. Young people need to understand the value of money.” Developing saving habits is essential for young people. Aziz Ihani, vice president and senior portfolio manager for Morgan Stanley Smith Barney of Laguna Niguel, says, “I believe that about 10 to 20 percent of a young person’s income should go toward savings dependent upon cash flow and needs. Beginning to save early is very important because people put savings off, and by the time they think about it, it is too late.” Retirement is often the furthest thing from teenagers’ minds. But for those who are employed, participating in their company’s 401(k) plan can be extremely beneficial. A 401(k) is an employment-related retirement plan in which the employer and/or the employee contribute a percentage of his or her income into a tax-deferred account. This is a convenient way to save and invest for retirement. “If a teenager has a job, she should consider creating a 401(k); it is all about building good saving habits,” says Clements. “For a young individual, take advantage of a Roth 401(k). Over time, she will receive a tax deferral.” If a teenager is not employed, an Individual Retirement Account may be a viable option. An IRA functions similar to a 401(k) but can be open and maintained as an individual. Contributions are deductible, and earnings are also not taxed. Teens and credit cards are often a bad combination, but it is important for teens to begin to establish a credit record.  “I think teens should have secure credit cards with a maximum balance,” says Clements. “Credit cards target teens and college students. I recommend a secure or low-limit credit card.” Options such as Visa Buxx, Capital One Secured MasterCard for Young Adults, and Citibank’s Citi Cash Card can help people build credit. With a credit card, it is vital that the card is paid off monthly, because interest rates can be high. Young people do not want to create a financial hole for themselves, but do need to begin to build good credit. Although a number of prudent investment, savings and credit-building opportunities are available to young people, they still need to learn the fundamentals of budgeting and fiscal responsibility. Investment advisors recommend that children do some sort of budgeting and expense tracking. With resources like mint.com and Quickbooks, young people can track their expenditures and see where their money is really going. Setting up a budget with parents’ assistance is always helpful. Lauren Giudice is a contributing writer to OC Family magazine. MONEY MANAGEMENT 101 > Practical Money Skills provides teens with a downloadable tutorial on the true value of money and how to be financially smart. practicalmoneyskills.com > Visa’s Go Responsibly web page provides financial guides for young people in any stage of life. usa.visa.com > Saving for College has tips, resources and information about saving and paying for higher education. savingforcollege.com > BalanceTrack has a step-by-step process that helps teens save for their goals. balancetrack.org > The FDIC site has guides to help teens save and borrow money, spend prudently and more. fdic.gov > Ameriprise Financial develops guides for families on how to budget, save for college and invest. ameriprise.com |
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