Teach Finances to Your Kids

It’s your responsibility to teach finances to your kids.

Teach Finances to Your KidsI grew up as a pastor’s kid. Here’s what I learned about finances:

  • Taxes made dad angry and mean
  • Money problems made my parents yell at each other
  • Being a pastor didn’t pay very well
  • Dad emptied my passbook savings to pay our bills
  • Grandma bought us what we wanted and needed

As I grew older, I learned that:

  • Dad was secretive and controlling with finances
  • We hadn’t given tithes and offerings in years
  • We weren’t paying taxes the last few years before dad filed for bankruptcy
  • Dad had opted out of Social Security and was not saving toward retirement
  • The money was being spent on dad’s porn habit

I grew up with no real intentional education about biblical stewardship, saving, investing, paying bills, debt, or doing taxes. I did have one pretty awesome entrepreneurship experience selling homemade cupcakes to construction workers, but that’s probably a different post.

Now that I’m a pastor, I’ve learned that I could easily make the same mistakes. And for a long time, we were living beyond our means, I was neglecting tax planning, and I found myself resenting the pastoral call… “Why couldn’t God have called me to a job that made decent money?

Once we became intentional about paying off our debts, understanding our taxes, having an emergency fund, and investing and saving for the future, I found that my attitude became better. I enjoy pastoring more now that my finances are under control! (Thanks, Dave Ramsey!) Click To Tweet

Not only have I become passionate about empowering other pastors toward financial wholeness, I’ve also become a little fanatical about teaching finances to my son.

Here’s what we’ve done. It may not be exactly what you would do. But I hope this list helps you to think about how you can be intentional and teach finances to your kids.

Ages 3-6

Allowance and Commission

Very early on, we decided to give Nathaniel money on a regular basis. We gave him an allowance for the express purpose of teaching him how to put the money regularly into his Giving, Saving, Spending Bank.

We did not pay Nathaniel commission. Commission is paying your child for the chores they do. This can be very useful for creating a work=money link in the brain. But it can also teach a child not to contribute to the household unless there is an economic benefit.

I don’t think we made a conscious decision NOT to pay for chores, we just didn’t do it.

At any rate, we paid an allowance and helped Nathaniel divide it into three parts: Giving, Saving, Spending.

Giving, Saving, Spending Bank

Teach Finances to Your KidsWhen Nathaniel was about 4 years old, we bought him “My Giving Bank” by Larry Burkett. This bank is divided into three separate compartments: 1. A Bank (for saving), 2. A Store (for spending), and 3. A Church (for giving).

We would give him $3 and help him put one in the bank, one in the store, and one in the church.

Every week when we went shopping, he would bring the money from the store and try to spend it.

Every week when we went to church, he would empty the money from the church and give it as offering.

And the money in the bank just sat there growing and growing, saving up for something at a later date.

When Nathaniel would get more money ($20 as a gift, for instance), we would help him put at least 10% into church, at least 10% into the bank, and the rest into the store. Sometimes he would want to put more in the church or the bank. And that was okay, as long as he had his reasons.

As he grew older, we increased his allowance and he would establish savings goals and learn to differentiate between tithes and offerings. But this was a great way to start things out.

The Moonjar Moneybox and Money Savvy Pig do the same thing.

Ages 6-8

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Early Withdrawal Penalties (might not be so bad)

early withdrawal penaltiesEarly withdrawal penalties may have scared people off from investing in the right place! If you’re investing in a non-retirement account and your retirement accounts aren’t completely maxed out, you’re probably throwing away thousands of dollars!

All we need is 403(b)!

If you’re a minister, you can invest in a retirement account through a 403(b). A 403(b) is a tax-sheltered annuity, which means you put money in before it gets taxed and it’s sheltered from taxes while it grows. Clergy members also have a benefit of being able to withdraw from a 403(b) tax-free for housing expenses after retirement!

A 403(b) does an amazing job of lowering your taxable income (therefore lowering your taxes) and helping you save for retirement. In 2015 and 2016, you can put up to $18,000/yr into your 403(b). Pastors over 50 may also contribute an extra $6,000/yr as a catch-up contribution!

How much should I put away for retirement?

Retirement and finance gurus like Dave Ramsey tell us to invest 15% for retirement.

If you’re a pastor, it’s likely 15% of your income won’t come anywhere close to maxing out your 403(b). And don’t forget, you can also use an IRA to reduce your taxable income and save up to $5,500/yr per spouse.

Let’s pretend you’re under 50, married, and make $100,000/yr as a pastor (Hah!). If you put away 15% ($15,000) toward retirement, you still have $14,000 in potential 403(b) and IRA limits that you could be sheltering.

After I’ve funded my retirement, where do I invest?

After you’re done putting 15% of your income into retirement accounts, where should you invest?

Most people will open up a non-retirement investment account at Charles Schwab, Vanguard, T. Rowe Price, or Fidelity (BTW, these are the ONLY four places I would consider).

But why? Why would you invest in a non-retirement investment account when there’s plenty more room to invest in your retirement accounts? Three little words: Early Withdrawal Penalties.

Everyone will tell you that you need to invest in non-retirement investment accounts because:

  • Non-retirement account withdrawals are taxed at only 15% (capital gains taxes)!
  • Retirement account withdrawals are taxed at your marginal tax rate (25% for most pastors)!
  • Retirement accounts are additionally subject to 10% early withdrawal penalties!

So it seems like it would make sense. If you want to grow your investments, withdraw them, and not have them subject to higher taxes and penalties, you should invest in a non-retirement investment account. Right? Wrong.

When I did the math, it blew my mind!

It turns out that the benefit of being able to put more money into a retirement account (remember, it’s pre-tax) completely outweighs the benefits of investing in a non-retirement account.

NOTE: I AM NOT suggesting that you pillage your retirement account! I’m simply saying that if you have more room in your retirement account, it can make you thousands of extra dollars over investing in non-retirement accounts. AND it can lower your taxes!

early withdrawal penalties might not be so badLook at the comparison chart I put together. This chart assumes a one-time investment and marginal tax rate of 25%. It also assumes a 10% return on investment each year for math convenience.

The same money will buy you $10,000 of investments in a 403(b) OR $7,500 in a non-retirement account. This is because you have to pay $2,500 in taxes on the $10,000 before you invest in a non-sheltered account.

Being able to invest a higher dollar figure into your 403(b) makes the higher tax and early withdrawal penalties completely irrelevant. Even if you take an early withdrawal again and again and again, it still makes more sense to start with the higher initial investment that can be made pre-tax.

What I’m saying is this: If you have not maxed out your 403(b) AND your IRA limits, you’re throwing money away by investing in a non-retirement account.

Are you considered Clergy for tax purposes?

clergy for tax purposesThe IRS is specific about who can be considered clergy for tax purposes. This is important! Only clergy receive the “housing allowance” tax benefit, clergy-specific 403(b) distributions, and a clergy Accountable Reimbursement Plan.

You may be ordained and employed in something you consider a ministry, but the IRS may not agree. You may be a missionary, evangelist, chaplain, administrator, itinerant preacher, educator, or ordained wedding celebrant and NOT meet the IRS guidelines.

Here’s how to tell if you’re clergy for tax purposes. (ProTip: The IRS can’t figure it out by your vestments.)

5 Questions:

  1. Are you Ordained, Licensed, or Commissioned?
  2. Do you administer ordinances or sacraments (baptism, Lord’s Supper, etc.)
  3. Do you conduct worship?
  4. Do you have management or administrative responsibilities in the church?
  5. Does your church consider you a religious leader?

To qualify as clergy for tax purposes, you MUST answer “yes” to question 1 AND to a majority of questions 2-5.

If you ARE clergy, congratulations!

If you ARE clergy, you will need to understand:

  • Housing allowance, calculation, and tax benefits
  • 403(b) tax-free distributions as housing allowance
  • Exemption from Income Tax withholding
  • Calculating and paying Quarterly Estimated Taxes (or arrange to withhold on W-4)
  • Paying both parts of SECA (not FICA)
  • Setting up a 100% Accountable Reimbursement Plan

Clergy Financial Coaching can help you understand the unique financial and tax needs of pastors and walk alongside you in ministry to find financial wholeness.

Schedule a FREE 30-minute coaching session to get some clarity on your financial future!

This Week’s Abysmal Market

The Dow Jones Industrial Average plunged over 500 points today. The stock holdings in your 403(b) just went down by 3%. If you had $100,000 in your retirement account on Friday morning, you only had $97,000 by market close on Friday afternoon.

Dow Jones

Looks pretty abysmal, doesn’t it? People are selling their stock (that’s how the price goes down), exiting the market right and left, freaked out about China and our soft economic recovery.

But I want to show you another chart.

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When the bough breaks (in Greece and China)

crashLast week, Greece made the US stock market dip by a couple percentage points. And stocks have stayed down. Over the last few days the Chinese markets have lost over 10%. That’s one hefty correction. With all the loss over the last week, my 403(b) looks a touch skinnier in the mirror.

Remember, if you’re investing in equities, you’re looking at gain/loss cycles of 5-10 years. So what happens in one day or one week (or year) doesn’t really matter.

You want to keep your money in for a long time. And over the long run your investments will go up as companies create more value and realize more profits. Which they will.

What a downturn means is that equities are cheaper to buy right now!!!

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