Raising children who understand the value of money gives them an advantage. So, that means your kids need to know about taxes. Of course, receiving a check at their first job for much less than the $15 per hour stated on the employment agreement is one way to find out. 

Instead of believing that they’ve been robbed by their employer (or the government), by learning early on why taxes are deducted from their checks, they’ll understand that some of the taxes taken out pay for Social Security and Medicare when they’re no longer able to work. 

They’ll also find out that federal and state taxes pay for things like the police and fire departments in the town where your family lives, as well as roads and bridges in addition to national defense and parks. Maybe even more important to many kids today, the fiber optic infrastructure that allows them to stay online all day!

As a taxpayer, of course, you well know that taxes can be complicated. While you know that you don’t need to burden your five-year-old with the difference between marginal income tax rates and capital gains rates, you might not be sure what your kids need to know and when. 

As always, you know your children best, and you might want to let them in on some of these topics earlier or later than suggested, depending on personalities and experience. The ranges are pretty broad, though. Take the opportunity to make sure they’re clear on the foundations before you start teaching them more advanced topics.

Children ages 5-10 need to understand tax basics

Even in elementary school, your kids can absorb some fundamental and easy lessons about taxes. It’s probably easiest to start while you’re shopping at the grocery or toy store. Find an item whose price is easy to understand, like $1 or $5 or $10. (Good luck in some of the stores, which for behavioral finance reasons, charge $4.99 or $9.99 instead! But that’s a lesson for later.) 

Run the item(s) through checkout separately, so it’s clear on the receipt how much tax you paid. Point out that while the price was $5, the amount that came out of your pocket was slightly more than that. 

They’ll want to know where the money goes. At this age, there’s no need to get very specific. Your kids only need a high-level overview; that money goes to the government to fund things like parks, police, and schools. No need to get political here either; just the basic facts will do.

Middle school/junior high, ages 11-13 need to understand taxes in relation to their paycheck

At this point, your kids will be familiar with sales taxes, having seen you shop. Maybe they’ve been able to shop themselves.

They’re old enough to begin learning about other taxes, such as income tax, property tax, and Social Security/FICA. Show them your pay stub and discuss the various amounts that have been deducted and why. If you have Social Security statements, you can demonstrate where the money goes later on in life.

Let them know what the deductions for Medicare and Social Security pay for. You can also explain the federal, state, and potentially local taxes. They should have a basic understanding of the US government from school and know that the federal government is in charge of some things, and state and local governments run others. Taxes at every level support all these different branches of government.

Although you’ll explain the deductions from your paycheck to them in some detail, that’s not the central concept they need to know. The big lesson here is that the money they earned according to the stated pay rate is not what shows up in the paycheck. 

Show them the difference between the stated rate and what gets deposited into your account. Of course, not all deductions will be taxes since you likely have health care and retirement contributions taken out as well. Talk to them about the importance of budgeting with the net amount after taxes and other deductions, not the gross income.

Show them your property tax bill as well. Property owners fund local improvements and projects, so they need to understand where the money goes.

Teens 14 and over need to understand how to file their taxes

At this age, your kids are probably paying taxes in some shape or form already. They’re paying sales tax when they shop, and if they have jobs, they’ll also be paying income tax. They know the reality of paying taxes, especially if you’ve been educating them along the way.

If they do have part-time (or other) jobs, show them how to keep their documents organized for tax time. Let your kids know about the importance of W-2s and why they need to keep track. They should do their income taxes (with your guidance, of course) during this time. 

There are plenty of online software applications to use, which makes it easy. My dad made me do my taxes when I was in high school, and back then, we had to use paper forms and read the instructions. 

Doing their taxes each year helps your children understand the basic calculations and the importance of tax deductions. They’ll also be in the habit of doing their taxes annually, so they won’t need to worry about IRS fines and fees later on.

If they don’t have their own jobs, they can sit with you while you do your taxes online or go to the CPA with you. 

When your kids start asking why so much money goes to taxes, discuss how Congress sets the rates. You can also show them that income tax rates change over time. For example, income tax rates on high earners are currently significantly lower than when the government built the interstate highway network across America and other big infrastructure projects in the middle of the last century.

If they’ve been investing, or you’ve been investing on their behalf, introduce capital gains tax. Explain how they only pay it when investments are sold. Let them know about capital losses, which can reduce the amount of capital gains they’ll need to pay taxes on.

Understanding income and capital gains taxes is an excellent segue into the importance of tax-deferred accounts. You know your children will need a significant amount of assets in the future and the need to start saving early to take advantage of compound returns. Show them what a difference not paying income and capital gains taxes on the money they accumulate in these accounts makes down the road.

If you’ve been saving for their future in college 529 accounts, you have another chance to showcase the importance of deferred or tax-free (for qualified expenses) money. Depending on when you started funding the accounts, you can also demonstrate the power of compounding over time. 

There are many opportunities to teach your kids about taxes in an age-appropriate way. It’s critical for them to understand the difference between gross and after-tax income to know how to budget appropriately. Tax season is an excellent time to demonstrate to your older kids why they need to understand IRS rules and regs.

If you’d like to talk to us about investments for your kids, please feel free to give us a call at 619.255.9554 or email us to set up an appointment.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Your road map to financial security.

Women face many unique challenges when it comes to personal finance and investing.

• Physical and emotional – longevity, more subject to elder abuse, more likely to struggle after divorce or death of partner.
• Workplace – lower salary over fewer earning years, out of workforce caring for family.
• Behavioral – less confident about investing skills, more likely to start investing later, invest in less risky assets, less likely to participate in workplace retirement plans.

What does freedom mean to you – starting your own business, going part-time or leaving the workforce, moving abroad, leaving a relationship or job that isn’t right for you, living without debt hanging over your head?

Draw a persuasive picture.

• Imagine yourself in the future.
• Anticipate your emotional reaction when future self is able to retire without stress.
• Visualize reaching your goals.
• Positive reinforcement about good things your past self has done.
• Remove obstacles such as inertia.
• Put decisions on automatic pilot

Where do you want to be?

• When do you want to retire?
• What does retirement look like to you?
• How much will that retirement cost?
• Do you have flexibility?
• Do you have short-term goals that also need to be funded?
• What is your time horizon?
• Do you know how much your Social Security Benefit will be?
• How much do you need to save?
• How will you bridge the gap?

.

Reading List

Lean In by Sheryl Sandberg

Don’t Ask by Linda Babcock and Sara Laschever

The Marshmallow Experiment

4% Rule by Bill Bengen

Action Plan

Now is the time to review your accounts, to check for diversification, and to make sure your asset allocation matches your risk tolerance.

Would you like to know your risk tolerance score?

 

We invite you to complete our online risk tolerance questionnaire. You will receive a personalized and comprehensive risk report. Once you have an idea of your risk number, you can give us a call and we will be happy to review the results and look over your investments to make sure your allocations are aligned with your risk profile

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

In the consumer economy, credit is pretty easy to obtain. That often leads to problems for those who don’t know how to use it wisely. At the other end of the spectrum, some people avoid using credit altogether. Smart people use smart credit strategies to maximize their financial position.

Credit provides leverage to help consumers build assets and wealth. In honor of March being National Credit Month, here’s the lowdown.

Why do most Americans need credit?

Now that credit scores are national, standardized, and organized by the three credit-reporting bureaus, it’s become a popular measuring tool. Before 1989, credit scores were localized affairs and used mainly for just obtaining loans or credit cards. 

Today that’s no longer the case because credit scores aren’t just for lenders anymore. It’s essential to monitor your score since there can be a lot riding on it. In today’s world, it’s necessary to have one in the first place. 

Americans who don’t have at least one credit card will likely find themselves disadvantaged in various financial situations. Not only when it comes to arranging for a mortgage to buy their house but also in finding a job and renting an apartment. 

Landlords and employers often request a check on the applicant’s credit history. Some consider the lack of a credit score even worse than a bad one. Good landlords may not rent to someone with no credit at all.

Most Americans must build a retirement nest egg through contributions to a retirement plan. Still, a significant source of household wealth remains the family home. Buying a house for cash is beyond most people’s means, so financing through a mortgage is critical. A history of good credit means a much lower interest rate added to the principal cost than a higher rate for someone with poor or no credit at all.

That’s why young adults need a credit card and learn to use it responsibly by paying off the balance every month to avoid interest charges. That’s the best way to start a history of good credit, as well as avoiding the pitfalls of having too much revolving debt.

Maximizing the use of credit cards

As long as you pay off the card balance each month, the amount due doesn’t continuously increase with interest payments. Using credit cards can help consumers build wealth. 

In addition to making money, wealth depends on not losing money or giving up too many gains. If someone gains unauthorized access to your card, it’s easier to dispute a transaction compared to a debit card.

Make money with your credit by finding cards that provide rewards that match your lifestyle. If you do a lot of traveling (and will resume after the coronavirus pandemic), then a card that offers travel rewards makes a lot of sense as long as the annual fee doesn’t wipe out the reward. 

When you have good credit, it’s easy to find a credit card with low or no fees that give you rewards on your purchases. Cashback is a great reward, but many cards these days offer points instead. You can still benefit from the points rewards because you can exchange points for various merchandise and gift cards. Now you’ve got presents for birthdays and holidays covered.

Smart credit as leverage

While credit cards are one example of credit, they don’t provide you with any leverage because you pay the balance every month. Using different credit types to buy assets gives you the ability to invest more without paying the entire amount upfront.

What kinds of assets does credit help you leverage? Technically vehicles are listed as assets on the balance sheet, but they depreciate quickly. Taking out a loan to buy a car doesn’t provide you with an asset. 

However, taking out a loan (mortgage) to buy a property or taking out a loan (student loans) to increase your human capital will help you accumulate wealth when used correctly. 

Being smart about leverage allows you to invest in something that you can’t afford to pay for entirely right now but will be able to in the future (given some reasonable assumptions). Using leverage to buy an asset (or capital) that you won’t be able to maintain in the future sets you up for potential disaster. Keeping it reasonable helps ensure the loan amount won’t wreck your finances down the line.

Using credit for smart timing

For example, initially, interest-only (IO) mortgages were used for people who logically expected enough income in the near future that would then allow them to pay down the principal. A typical example (at least here in California) is a Hollywood director who could expect millions from one film released after nine months. The IO loan helped them buy a decent house now rather than wait a year for the money to come in. 

These loans weren’t intended to finance too much house for people who didn’t expect they’d be able to afford the payments. Of course, IO loans aren’t the only ones that can be misused. You’ve probably heard of the phenomenon known as being “house-poor,” where the housing and associated payments eat up most of the homeowner’s income. 

Sometimes that’s due to something unexpected like job loss. But sometimes, it’s due to a mortgage that’s larger than the homeowner can reasonably expect to carry for 15 or 30 years. While layoffs and recessions aren’t predictable, the amount of income you need to sustain a mortgage and associated housing payments is. 

Using smart credit for better returns

Home equity loans make sense when you’re making improvements to the home that will increase its value. They make less sense when you’re taking the money out to buy something. 

Similarly, refinancing a mortgage is a great idea when either rates have dropped or your credit has improved to the point where you can substantially save on payments. It’s a bad one when you’re trying to take money out for a purchase because you don’t have any other cash available. Especially an investment that doesn’t result in ownership of an asset.

If you’re building a business that’s likely to grow and prosper, taking out a business loan to get through those first lean years is an excellent use of leverage. It works with investment real estate, too. Many lenders will allow you to use the property’s expected rental income to increase the loan principal. 

Making sure that the amount is within reason applies to student loans as well. Taking out a 6-figure loan to pay for school may make sense when you’re entering a field, like medicine, where you’ll be richly rewarded with hundreds of thousands of dollars a year. But it’s way too much for a job where the average income is only in the five figures annually.

Using credit wisely and as leverage to accumulate capital and build assets is an integral part of a smart financial plan. Debt isn’t necessarily a bad thing, as long as you manage your credit exposure and avoid incurring unnecessary interest charges.

Good credit is necessary for the modern world, so having at least one credit card paid off monthly is helpful for many financial decisions.

Are you thinking about refinancing a mortgage or investing in property? Feel free to give us a call at 619.255.9554 or send us an email to set up an appointment.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.