Wednesday, May 23, 2012

Investing For the Kids

For many of us, we struggled with student loans, car payments and credit card debt because we didn’t know any better.  I want to change that for my kids.  I’m teaching them how money can work for them and how it can work against them.  Another thing we’re going to be doing for our kids is investing for them.  I’m not talking about saving for their college educations.  I’m talking about investing their money so that in 15-20 years, when they get these accounts, they will have a substantial amount of money. 

We’re going to open an UTMA (Uniform Transfers to Minors Act) accounts for each of our kids.  An UTMA is a type of account where a person can gift and invest for minors. The investment is automatically transferred to the minor upon reaching 18 or 21 (the age of majority) depending on the state you live in.  The UTMA age of majority in NY, where I live, is 21.

One of the most common reasons people do not open an UTMA is a fear their child may not handle a substantial amount of money maturely.   I say to you, most adults can’t handle a substantial amount of money maturely.  We’ve already started to teach our children about money and how it works; they get paid for chores, they go to their bank and deposit their money into their savings accounts and they have piggy banks in their rooms so they can see the money accumulate.  I feel very confident that by the time our kids are in their early-twenties they will have had 15-18 years of financial education not taught in high school or college. 

Another reason people choose not to open an UTMA for their children is because it may affect their children’s ability to attain financial aid for college.  Assets in your child’s name can be counted against them since financial aid is awarded based on need.  If you were to put the money given to your child in a savings account that money would be counted as an asset as well.  Would you rather have money in a savings account earning less than 1% or would you rather use the power of dividends and compounding interest in their favor?  We will be safely investing our children’s money.
Since this is their money they should be able to give and spend some of it as they like.  This is part of teaching them about how money works.   However, we will invest a portion of their money to take advantage of the long term gains of stocks, bonds and commodities.  Can you imagine how different your life would have been if your parents taught you the value of hard work, gave you a financial education of how money could work for or against you, and gave you nest egg to start with?  How different would your life be?  Would that, as Dave Ramsey says, change your family tree? 

I’d like show you a portion of how Dave Ramsey explains the importance of investing early:
 A Millionaire’s Best Friend
One awesome thing that you can take advantage of is compound interest. It may sound like an intimidating term, but it really isn’t once you know what it means. Here’s a little secret: compound interest is a millionaire’s best friend. It's really free money. Seriously. But don’t take our word for it. Just check out this story of Ben and Arthur to understand the power of compound interest.

Ben and Arthur were friends who grew up together. They both knew that they needed to start thinking about the future. At age 19, Ben decided to invest $2,000 every year for eight years. He picked investment funds that averaged a 12% interest rate. Then, at age 26, Ben stopped putting money into his investments. So he put a total of $16,000 into his investment funds.

Now Arthur didn’t start investing until age 27. Just like Ben, he put $2,000 into his investment funds every year until he turned 65. He got the same 12% interest rate as Ben, but he invested 23 more years than Ben did. So Arthur invested a total of $78,000 over 39 years.

When both Ben and Arthur turned 65, they decided to compare their investment accounts. Who do you think had more? Ben, with his total of $16,000 invested over eight years, or Arthur, who invested $78,000 over 39 years?

Believe it or not, Ben came out ahead … $700,000 ahead! Arthur had a total of $1,532,166, while Ben had a total of $2,288,996. How did he do it? Starting early is the key. He put in less money but started eight years earlier. That’s compound interest for you! It turns $16,000 into almost $2.3 million! Since Ben invested earlier, the interest kicked in sooner.

What are you going to do for your kids?  I know what we’re going to do for ours...

Wednesday, May 16, 2012

The Beauty of the Emergency Fund!

Sorry for the delay in posting this blog post.  These past two weeks have been somewhat of a whirlwind.  We’ve had a broken toilet, sick kids and major car problems.  I’m not sure I can explain to you how thankful we are to have an Emergency Fund as well as a savings account for medical expenses!  

A few weeks ago, I installed two new toilets in our house.  Both installations went very smoothly, or so I thought.  I’m assuming I tightened one of the floor bolts too tightly and cracked the “ear” of the flange (the flange is the pipe fitting that mounts the toilet to the floor as well as connects the toilet to the drain pipe).  So, basically, only one side of the toilet was bolted to the floor. I attempted to replace the flange myself but it was glued in place.  I watched a video online and the one thing the guy in the video kept repeating was not to break the pipe the flange connects to.  It made me sufficiently nervous so I called in my plumber, Mike.  Mike came over and said that I didn’t need to replace the flange.  Instead of having the bolt come up through the floor, he put toilet in place and put a lag screw from the top down into the floor.  Easy enough!  I wish I thought of that but for 70 bucks I got a lesson in how to think outside the box.  

Next up, sick kids!  The week leading up to my 20 year high school reunion, our youngest came down with a virus that went from his nose to his lungs.  A doctor visit and 3 prescriptions later, he was on his was to health.  Then this past week, our oldest came down with a sinus infection that crept into his lungs.  Again, a doctor visit and 3 prescriptions later he’s on his way back to health.  Kids get sick, I get that! This is why we have an account specifically dedicated to doctor visits and prescription costs. 

I saved the best story, which happened first, for last.  On our way down to the reunion we got stuck in traffic.  All of a sudden, right before we got to the Whitestone Bridge, which connects The Bronx and Queens, the heat on the car shot through the roof!  It was as high as it could go and we were standing still.  I blasted the heat to try get some heat away from the engine and all that came out was cool air.  At that point, I knew the coolant level was practically zero.  Fortunately, right before the bridge, there was a gas station.  We pulled over, and thanks to the attendant at the station, we poured the coolant safely and were on our way.  

After an amazing time at the reunion, we headed back home the next morning. Aside from a few fill the coolant and check the gas stops, the ride was relatively smooth.  If you know anything about cars, you have probably diagnosed the problem; a blown head gasket.  Head gaskets aren’t cheap but having the second car has become as close to a necessity as you can come.  Fortunately, we have the emergency fund so we paid cash.  Hopefully the car will last long enough for us to save up for new ‘gently used’ car.  

Now, I hate parting with money and this has been a stressful two weeks, relatively speaking.   We’ll adjust our budget to rebuild our emergency fund so that it is fully funded.  I don’t want to go any longer than I have to without one.  A fully funded emergency fund made what could have been an insanely stressful summer to a stressful two weeks.  Is your emergency fund fully funded? 

Wednesday, May 2, 2012

It’s Amazing the Difference 10 Years Can Make!

My 20 Year High School Reunion is this coming weekend and it brought me back to my 10 year reunion.  Well, not really my 10 year reunion, per se, I didn’t attend, but back to my life 10 years ago.  Life has changed dramatically over that time!  

10 years ago, Andrea and I were on one of our patented “breaks”; I was a mess physically; I was a mess financially; I was about to graduate with my MBA and the job market had turned from great to awful in the 2 years I was in school; and I was in those “tweener” years, as I like to call them, in which I was no longer a college student but I wasn’t a working adult.  I felt like I was in “The Waiting Place” Dr. Seuss made popular in his book “Oh the Places You’ll Go!”  No truer words have ever been written than those written in this book!  I read it to my children, not only because I want them to learn the lessons contained within its pages, but because I, myself, need to be reminded of them every so often.
Today, as I sit and write this post, Andrea and I are married with two amazing boys; we are financially healthy; we are physically healthy; and we are incredibly goal oriented.  How did I get here?  What changed?  

It all started with a conversation I had with my cousin Kevin.  To sum up a 2 hour deep conversation, he told me that I could be whatever I wanted but that I had to go and make it happen; he told me that I had to surround myself with people who inspired me; he told me that I was a good person but that I had to find myself again; and he told me that he would be there for me.  This conversation had such a profound impact on my life that I named my second child after him.   

The weekend after that conversation, I applied for Business School.
In between my first and second year of business school, I saw a picture from a friend’s bachelor party and it was embarrassing!  I was fat.  I was very fat!  I hadn’t realized I had gotten so big, so unhealthy!  I decided to go on a diet.  I had lost weight before but this was different.  I needed to lose a lot of weight.  I read about and started the Atkins diet.  I lost the weight, and lost it quickly. I realize now how unhealthy a diet I had chosen but that’s another story.  I was feeling good but there were other aspects of my life I needed to improve.  

The next obstacle, the pack a day cigarette habit I developed in college.  I had quit many times before without success so I decided to make a change in how I quit.  I used a medication to help with the cravings but the big change to how I finally quit was to train for a marathon.  Andrea and I quit smoking around the same time and she suggested we train for a marathon.  How could I smoke while training for a marathon?!?!  8 months after quitting, I completed my first marathon.  To be honest, I’ve yet to complete my second but I think it’s time to run one again.  Unfortunately, Andrea’s bum knee kept her from training for, and running in, the marathon.

After I quit smoking and decided to train for a marathon, Andrea and I had conversation about getting serious.  For years we had floated in this thing we called a relationship, stuck in a break up get back together cycle that we hadn’t broken.  Not until we decided to break that cycle and actually commit to each other did our relationship take off.  Shortly thereafter, we got engaged!  

After Andrea and I had gotten married, she kept insisting that we needed to get out of credit card debt.  I knew she was right so I finally started my quest to find the perfect book to guide us.  As I mentioned in my “About Me” on the left side of this page, I found “The Total Money Makeover” by Dave Ramsey and found my passion!  

I figured out that I am here today because I made the decisions to not be fat anymore; to quit smoking; to commit to my wife; and to get out of debt!  I became accountable for my actions.   I owned my shit!  No one was going to fix my life for me; not my family, not my friends, nor the government.  I had to start making good decisions and be accountable for my actions! I can’t remember where I first heard this but it fits, “Life isn’t complicated! It may be hard but it’s not complicated!"  Make good, thoughtful decisions, surround yourself with people who inspire you and more often than not, you’ll be making good decisions!  If continue to make good decisions , and constantly improve,  you’ll look back over 10 years and be amazed how far you’ve come.