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How can I help my children achieve financial success?

Judit h Ward , CFP®, a senior financial planner with T. Rowe Price
Judith Ward, CFP®, a senior financial planner with T. Rowe Price

Judith Ward, CFP®, a senior financial planner with
T. Rowe Price, shares three ways to help your children enter adulthood on solid financial footing.

As a financial planner and a mom, I get a lot of questions from parents wondering how to help their children financially. My advice: Teach them sound habits at an early age and offer assistance that will help them keep debt to a minimum and will show them the benefits of saving throughout their lifetime. Here are three ways to set them up for success.

KEEP COLLEGE DEBT TO A MINIMUM
The path to opportunities for your children often begins with a college education. But due to the rising costs of tuition and related expenses, the average student who borrows for college today graduates with more than $26,000 in debt—a significant amount for a young professional to manage.1 A 529 college savings plan is one of the first things you can establish to financially help your child. Any earnings in the account are tax-deferred, and distributions are free from federal tax and, in most cases, state tax, provided you use the money for qualified higher education expenses. You can start a plan regardless of income level, and anyone— including relatives and friends—may contribute to it, up to a limit established by each plan. Click here for more information on college savings plans managed by T. Rowe Price.

PROVIDE A RETIREMENT SAVINGS FOUNDATION
It’s never too early to help your children start to save for retirement. To them, this may not seem like a priority, but the sooner they begin investing, the sooner they start reaping the benefits of compounding, which can become significant over decades of potential growth. As soon as they have earned income of their own, such as wages from a part-time job, you can help them open a Roth IRA. Contributions can be made on their behalf up to the amount of their earnings, with a maximum of $5,500 in 2013, so they don’t need to deplete their own savings in order to get started. Keep in mind that there may be gift or other tax implications, so it’s important to consult a tax advisor familiar with your personal situation. When your children become more independent, you can encourage them to begin contributing on their own and take more ownership in saving for their financial future.

BE A GOOD ROLE MODEL
If your children are like mine, they don’t miss a thing! They will learn financial habits by observing how you use, talk about, and interact with money—so it’s important for us as parents to demonstrate good financial behaviors to reinforce what we’re teaching our kids. Planning for the cost of college is a great opportunity to talk to your children about financial goal setting. They can see firsthand how important it is to prepare for a major expense and ideally experience the reward of starting an independent life debt-free. Opening and contributing to a Roth IRA is a practical way to get your children thinking about their futures beyond college while witnessing the powerful benefits of saving. Actively engaging with and involving your children in appropriate and relevant financial matters can be the most effective way to help them become invested in their future, setting them up for financial success.

1The Project on Student Debt, 2012.

photograph by sarma ozols

1 Unforeseen expenses can be mitigated by establishing an emergency fund.
2 Judith Ward, CFP®, a senior financial planner with T. Rowe Price, explains how you can guide children toward financial responsibility.
3Jerome Clark, portfolio manager of the
T. Rowe Price Retirement Funds.
4Strong research is the foundation for these municipal bond investments.
5To attain financial security in retirement, you have to make sure you save enough.
6 A lapse in contributions doesn't need to translate into lost income in retirement.
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9 "Social insurance" originally was proposed when more people started to live beyond their ability to work effectively.
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