Raising Productive Rich Children

In the Gospels, Jesus states that it will be tougher for a rich person to get into heaven than for a camel to fit through the head of a pin.  His point is not that there is some heavenly bias against rich people.  It is that when someone is wealthy, he/she tends to assign a great importance to himself/herself.  This can lead to putting either oneself first, or one’s wealth first.  Either of these actions disobeys the first commandment, to put God first before anything else.

It also appears difficult, from what I have been able to observe, for the children of extremely wealthy parents to grow up and amount to anything.  An example is Paris Hilton, who was recently arrested for drug possession in Las Vegas:  http://omg.yahoo.com/news/vapor-trail-leads-to-paris-hiltons-vegas-arrest/46349?nc

Here is an individual whom one would think had all of the advantages – wealth, great schools, connections – and yet her life appears to be a complete waste of breath.  While I’m certain there are plenty of exceptions, too many children of the ultra-wealthy spend their time going from party to party and spending their parent’s money on frivolous things.  I’m certain that the Hilton’s have worked extremely hard to build their hotel empire, but the outlook for their daughter does not look good.

While the Hilton’s are an extreme example, I’m certain there are a lot of lawyers, hedge fund managers, Wall Street executives and quants, business owners, and others who started middle class or poor, but now have children who have never known a life without plenty of money.  These children have a warped sense of reality, need to be taught how to handle money and, more importantly, make something of themselves.  There are also plenty of people in the middle class who would like to teach their children how to handle money to keep them from coming back home after college.  Here are some suggestions:

1) Start the kids on commission.  An allowance teaches children that they deserve to get money for breathing air.  Instead, teach children that work equals money.  Create a list of chores that can be done for a commission.  Very young children can do jobs such as putting away silverware, helping set the table, or dusting tables in the living room.  Older kids can start helping with the dishes, taking out the trash, weeding in the garden, folding the laundry, and washing the car.  Finally, teenagers can help mow the lawn, do the laundry, and other more dangerous chores.  In each case, don’t pay a child wage, pay what you would expect to pay an adult for that amount of time.  For example, a job that took a minute might be worth 50 cents.  One that takes a half-hour should at least pay $3.  If you would pay an adult $30 to mow the lawn, so should you pay your son.

2) Give the kids a choice at restaurants.  Many of us are drinking more water these days at restaurants.  Originally this may have been to reduce the number of calories taken in, but the fact that most drinks are now $2 or more is certainly an added motivation.  Children typically have no concept of the cost of their drinks, and order a juice or soft drink out of instinct.  They often take one sip of the drink and throw the rest away, resulting in an effective cost of about $2 per ounce for that soda.  Here’s an idea:  Before the waiter gets there, tell the kids that they can get $1 if they order water instead of a drink.  For younger kids, offer to buy a small toy out of the vending machines in front or at the dollar store.  This then puts a value on the drink that the children can appreciate.  You’ll be amazed how many waters are ordered.

3.  Start a Bank of MAD (Mom And Dad).  Let’s face it, bank interest rates are lousy.  I’m certain that it will soon cost money to keep money in the bank.  But the bank of MAD is available for the children with a fixed interest rate of 5% (or 10% if you’re really generous).  It comes with an old-fashioned passbook where interest payments are calculated when desired and deposits are recorded.  Teaching your children to save up for things by serving as a bank is a great way to teach them about compounding and saving.  Be sure to stress that the interest is a result of saving the money, such that with time one could have the money and the things one wants, rather than either-or.  A variant on this is a 401Dad, where money saved for a big-ticket item (such as a car) is matched by the parents.

4) Talk to your kids about credit cards and other types of loans.  Calculate your amortization (if you’re not handy with a calculator, there are various tools online) for your home.  If you’re on a thirty year loan, you’ll find out that for the first several years on the loan you’re paying mostly interest.  It actually takes more than 20 years to reduce the balance by half if you pay the minimum.  Credit cards, with their high interest rates, are even worse.  For any of your bills, see how much you’re paying in interest and share this information with your children.  In particular, figure out how much more you are paying for the item over the course of the loan versus simply paying cash.  It should help them avoid credit cards, and may even cause you to cut yours up.

5) When they leave the house, give them an emergency fund.  Probably the single best way to stay out of credit card debt is to have an emergency fund.  Most people do not intend to get into debt, but then have a car break down, an accident requiring medical attention, or another unexpected bill.  With an emergency fund containing 3-6 months worth of expenses, these little emergencies are simply paid for in cash.  Without it, they result in a credit card balance.  As interest and fees start to build up on the card, and everyone having expenses that equal what they make each month, one ends up in a situation where the card never gets paid off.

One of the best ways to keep your children out of this situation is to start them off with an emergency fund.  Explain to them that this is not a blow fund or a way to go on vacation.  It is only for emergencies, and should be replenished with vigor whenever it is depleted for any reason.

Hopefully, by starting to teach your children about handling money early, you can avoid boomerang kids.  And, if you’re in the unfortunate situation of having children who could go through life without working, perhaps sending them out on their own after college with $50,000 in their pocket would be a good idea.  Explain that they have had all of the advantages growing up, that you have given them enough to get a start and find a job.  Explain that you have made your fortune, and now they must make theirs.  Finally, explain that you love them enough not to allow them to waste their lives away on superficial things such as shopping and parties. 

Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friendhttps://smallivy.wordpress.comComments are also greatly appreciated, as is lively and friendly debate.  Also feel free to link to or reference posts – all I ask for is fair credit.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Help Your Child Invest in the Stock Market – Part 1: Mutual Funds

It is great to start children investing when they are young.  A child who has learned the power of saving and investing early will most likely do better at saving and investing than one who has not.  In addition, if you yourself are an experienced investor, you will be able to give your children some hands-on experience with you looking over their shoulders before they are out on their own.

This article will not go into the mechanics and rules in setting up a brokerage account for a minor.  That advice is best left to an expert in tax law.  Suffice to say that starting with a good broker to set up the account, and then consulting with a good CPA on the tax implications would be wise.  You should expect to set up a Uniform Gift To Minors (UGTM) account with yourself and/or your spouse as custodian.  There should also be little or no taxes in the early years since capital gains and dividend taxes only start above a certain threshold.

Once an account has been set up and funded (again, check with a CPA to avoid paying gift taxes), it is time to start working with your child to find initial investments.  At this point the choice should be made as to whether to have them start investing in individual stocks, mutual funds, or perhaps a combination of each.  This is really an individual choice, depending on your (and your children’s) tolerance for risk when it comes to handling money.  They are really in an ideal point to start investing in individual stocks since they have a long time horizon to make up for any early mistakes.  There would certainly be nothing wrong, however, to simply start investing in mutual funds and stick with it, perhaps adding a few individual stocks once a substantial portfolio is built.  This article will only cover mutual funds since covering both would be too lengthy.

If the choice is made to start investing in mutual funds, the rest is really simple.  A set of five funds should be selected that have different investment strategies.  For example, a set that includes a growth fund, a value fund, an international fund, an aggressive growth fund, and a growth and income fund could be one selection.  Another strategy would be to find a large cap, mid cap, small cap, international, and aggressive growth fund.  Yet another set would be a large cap stock fund, a small cap stock fund, a REIT fund, a growth and income fund, and an international fund.  A primary reason for choosing a fund should be the total cost (minimize loads and yearly expenses) since this will be a primary indicator of performance over the long-term. 

Note that each of these possible sets of funds includes 1)stocks in different size categories (large, mid, small), 2)international stocks (the US is not the only game in town anymore), and 3)funds of different volatilities (aggressive growth, growth and income).  Adding a REIT funds adds further diversification by including real estate into the mix.  The main point is to spread the assets out over a variety of kinds of stocks and investment strategies so that the performance of one portion of the portfolio can balance out that of the others.

Once the accounts are selected, start teaching your children these two of the three secrets to success in mutual fund investment – regular investment and rebalancing.  (The third secret, diversification, is taken care of through the selection of the funds).  Start off by buying some shares of one of the funds.  Then, start buying additional shares once per month or some other period of time.  If the child is earning an income, start having them set aside a portion of their income for investment – make it a regular part of their handling of finances.  If they do not, if you’ve chosen to give your children some money to start out with, perhaps give a regular amount to them to invest.

As time progresses, buy shares in each of the five categories until the amounts are roughly equal.  Then, start directing the monthly purchase to the mutual fund that has the lowest balance.  This will be buying more shares of the fund that has performed the worst, thereby “buying low.”  Once a sizeable amount has been built up in each of the funds (such that your contributions are much smaller than the fund balances), you can also start rebalancing by selling shares of funds that have done very well and using the funds to buy more shares of the funds that have not performed as well.  Note, however, that this will trigger capital gains, so it is better to achieve balance through the direction of contributions as much as possible. 

Start out early and teach the principles of regular investment, diversification, and rebalancing, and your children will be on the way to a bright financial future.

Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friendhttps://smallivy.wordpress.comComments are also greatly appreciated, as is lively and friendly debate.  Also feel free to link to or reference posts – all I ask for is fair credit.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Preventing a Double-Dip Recession – Things the Administration and Congress Could Do

As I’ve said before, the Federal Reserve has much more power over the economy than does the President or Congress, even though the President usually gets credit for good economies and blame for bad ones.  (For more information on the Federal reserve, see The Federal reserve and the Stock Market, https://smallivy.wordpress.com/2010/08/14/the-federal-reserve-and-the-stock-market/).  More than the Federal Reserve and the Government, the people who make up the economy have greater control still.  Certainly if people want to be productive and build businesses, unless the Government takes extraordinary means to prevent it, the economy will grow.  The Government does, however, have some control over the incentives people have for starting and growing businesses, making various types of investments, and hiring more workers.

This is not meant to be a political commentary.  It is meant to provide a list of logical measures that could be taken that would result in the economy picking up and the possible avoidance of a double-dip recession.  From an investor’s point of view, the more policies that are created that go counter to these measures, the more likely it is for the economy to remain stagnant or decline further.  The more policies that are created that follow these measures, the more likely it is that the economy will recover.

1) Make permanent the 2003 tax cuts, freezing tax rates where they are currently.  There is currently great uncertainty over the tax rates in coming years, which causes business owners to wait to hire more workers and expand.  Higher tax expenses might force them to lay off newly hired workers or sell off aggressively, losing money.  Note that one-time tax rebates and other gimmickry do not work as well as tax cuts since business owners do not set in motion long-term actions such as increasing staffing levels as a result of one-time income and reductions in expenses.  Also note that the state and local governments often do start new programs using one-time money which results in a budget crunch a few years later.

2) Make the bond holders from GM and other Government orchestrated bankruptcies whole.  By negating the contracts the bond holders had and placing the interest of other individuals ahead of them, the faith of individuals in contracts is shaken.  Likewise, forcing banks to rewrite mortgages has the same effect.  If contracts cannot be trusted to be enforced, the interest rates charged will include a higher risk premium to deal with the uncertainty of the terms of the contract.  This means that bond prices will be lower and funding for business expansion, home purchases, and other activities harder to get.  Note that I am not advocating paying bond holders with tax payer funds – tax payers should not need to insure the risk taken by others while they collect the profits. Bond holders should, however, be given additional interest in the new GM so that they can get paid back if GM ever recovers fully.

3) Simplify the regulations that must be met to start and build a business.  Small businesses create more jobs than any other sector of the economy, yet the amount of paperwork that must be filed is daunting.  How many jobs don’t exist because an individual with a good idea didn’t have the stamina to run the gauntlet?  Some of these policies are supported by the larger businesses because it keeps new competitors out of the market.

4) Reduce or eliminate the minimum wage.  There is only a certain price that will be paid for a given job.  Increasing the minimum wage simply causes companies to not do a particular kind of work, export the work out of the country, import illegal aliens to perform the work under-the-table, or develop technology to replace the jobs permanently.  Teenagers are having a particularly difficult time finding work this year, and the rate of unemployment for entry-level individuals grows with each increase in the minimum wage.  Note that if there were success in raising the minimum wage and passing the costs fully onto the customers, this would result in an increase in prices and thereby inflation, causing those at the bottom of the wage spectrum to end up in the same position within a year or two.

5) Remove Cap-and-Trade from the table.  The possibility of this large new tax causes uncertainty, which again reduces the incentive for companies to hire and grow.  Note that taking money from one group of businesses and individuals and giving it to others does not result in a net increase in wealth, and thereby, jobs.

6) Allow housing prices to fall to their natural levels.  Various measures that have been enacted have only served to slow the fall, causing home buyers to wait for prices to fall further before making purchases.  Once all of the fluff has been rung out of the housing markets and the true valuations reached the market can begin to recover.

If enacted immediately, by reducing uncertainty these measures would help lift the economy out of the doldrums.  Unfortunately current policy appears to be 180 degrees out-of-phase.