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...

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