The Personal Finance Playbook

The nice thing about real life is you can choose whether you pay rent.

My wife and I talk about what we’ll do when we have kids a lot.  We talk about how much it will change our lives, and what we’re afraid of about having them.  I think I’m most afraid of giving up my time, energy and money.  I know how selfish this sounds, but I think I’m most afraid of totally changing my life.  That being said, I do want kids.  I’m not sure it’s ever the right time or the right way.  I think it ends up being one of those things you can’t truly plan for, and I like to have a plan for everything (ask my wife about my all my plans if you know her;)).

When I do have kids, I’m going to try to give them the best possible shot at being successful.  Here are some of my ideas:

(1) Start saving for their education the day they’re born.  The current college savings tool of choice is a 529 account.  There’s more than one type of 529 out there, but instead of telling you all about them in this post, I’ll link to the Wikipedia page.  In any case, your contributions grow tax free, and if you start the day they’re born and make monthly contributions, you’ll save a bundle in the long run when you factor in the 18 years of growth in the long run.  This way, you get the pleasure of paying for your child’s education, should they choose to pursue one.  And what do they get?  They get to potentially graduate college debt free, something increasingly rare for Gen Yers.  Maybe reform will make things cheaper for future generations, but I wouldn’t count on it – I would count on your ability to make a monthly contribution to a 529.  Make it automatic.  Do it.  When the legislature creates something different or better, I’ll tell you about it on this blog;)

(2)  Offer them a retirement match.  This one’s from my dad, with a little twist of my own.  My dad understood Steven Levitt’s main principle of economics, “People respond to incentives.”  (Kids don’t necessarily respond to the same incentives as adults, but my dad tried to teach me adult lessons, anyway)  The deal my dad always offered me was this, anytime I chose to put money of any sort in my savings account, he would match.  I think this is a great incentive to offer kids to save.  It would be even better if that savings account was a Roth IRA invested in several key index funds.  Kids have a great advantage when it comes to investing – they have incredibly long time horizons.  If a 14 year old starts with $2k and invests $100 a year for 50 years (a total investment of just $7k), he or she will end up over $100k at the end of the road, assuming a very reasonable 7% annual interest rate.  Tweak the return to 8% annually and the number balloons to over $150k.  If you also factor in the 100% their making from your match, they’ll never again see these kinds of returns on invested capital in their lifetimes.  You’re going to give your kids money for all kinds of useless stupid stuff, why not put some of it in a place where it can make a big difference?

(3)  Set an example.  Statistically, according to the work of the authors of The Millionaire Next Door, most of the people that are wealthy in terms of net worth live frugally.  So show your kids how to live frugally by doing it yourself.  Spend less than you earn.  Explain what you’re doing to them, emphasize why, and take pride in it.  Being frugal is something to be proud of.  It’s not something to put your nose up about any more than buying a Rolex is, it’s simply a lifestyle choice.  Teach them why you’re making it.  Don’t pass up opportunities to teach them how money works.

(4) Give gifts that teach.  She’s not always going to love dolls, and he’s not always going to love the latest video game.  However, you could give them a book that teaches them something that they never forget.  Or you could buy them a share of a company they have a reason to be interested in (Make Disney, DIS), and follow the company together.  Use an example like that to teach them about things like income and dividends.  Get them some fun stuff, too, but kids get a lot of fun gifts.  By the way, I got a book about investing for my younger brother (who’s 12 years my junior) last year.  I have no idea what effect it has had or will have.  He did tell me he read it.  I’m not sure whether that’s the case.  That’s as far as he would go.  I guess we’ll see how it turns out.

(5)  Don’t give them everything they want.  I was reading some comments on another blog (with a much bigger following than this one – but that doesn’t make it better) a while back, and one of the commenters mentioned that their parents made them write business plans when they wanted something.  I assume they had to describe how they were going to use it, why they wanted it, how long it would last, how much it would cost, and how much a comparable item would cost.  Set whatever parameters you like.  I personally love that idea.  Kids shouldn’t get everything they want.  A business plan might be the sort of thing you could use to demonstrate to them exactly how they could make the money themselves.  If they understand how difficult it would be to make the money, they might not want it as badly.  In my experience, kids are a lot more reluctant to part with their money than they are yours.

Have any other ideas?  Suggestions?  I’d love to hear them by email or in the comments.  Thanks for reading.

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