Starting a Teenager’s IRA


My son has started to earn a bit of money through odd jobs, and I’ve convinced him that it would be a smart thing to start an IRA account rather than just blow all of his money on cars and stuff.  The reason is the effect of compounding.  Basically, for every six years that you have to invest in a wide basket of growth stocks (such as in a diversified mutual fund), you double your money.  This means that you’ll make twice as much starting at 16 than you will at 22.  How significant is this?  Well, a 16-year old who starts and IRA and puts in $2,000, then never touches it, will have about  $1.2 M at age 70.  To get the same result, he would need to put in $4,000 at age 22, $8,000 at age 28, and $16,000 at age  34.

In order to put money into an IRA, you need to have earned income, meaning money that was earned through a job or through starting a business, rather than money that is given to you or money that you earn through investing.  All of the money needs to be earned in the year it is put into the IRA, although you actually have until April 15th of the following year to send in the money.  So if you earned $2,000 in 2017, you could start an IRA with $2,000 and send in the money until April 15th of 2018.


One issue with a child starting an IRA is that many places have minimum amounts to start the account and minimum amounts that can be invested in a fund.  Many of these fund companies require minimum investments of $3,000 or more, which can be difficult for a minor to earn, let alone part with at the end of the year.  I found that he could start one with Vanguard with a $1,000 minimum investment, and that he would have two funds to choose from.  These would be the Vanguard Star fund and the Vanguard Target Date Retirement funds.

An issue he is having, however, is that even earning $1,000 will be difficult.  You see, his summer break is only 2 months long because we have a “modified year-round” schedule where   they only get two months off in the summer, then they get a two-week fall and spring break.  Add a family vacation and maybe a camp in there, plus he starts with the marching band a couple of weeks before school starts, and he doesn’t have very long to work a job.  He could work during the school year, but he has quite a bit of homework each night, so his grades would probably suffer.

Luckily, my son is something of an entrepreneur.  Seeing a need for regular chips and other good-tasting snacks due to the restrictions placed on the school lunch program by Michelle Obama’s initiatives, my son started a covert chip business where he sells chips to his classmates (and sometimes a teacher) between classes.  He claims that there is nothing in the school rules against selling snacks out of his jacket, and we’ve checked as well.  He has even started using an ice pack to keep chocolate bars from melting so he has added Hershey bars to the product mix.  (He says that girls almost exclusively buy the chocolate, where guys tend to buy chips.)  He is learning about running a business since he needs to keep a careful inventory of his expenses and sales so that he can file taxes and start an IRA.

Unfortunately, with his business he was only able to earn about $300 last year and is unsure if he’ll be able to continue this year or not.  I checked to see if there was a way he could start an IRA with less money.  I found that he could actually start a custodial IRA with as little as $100 at Schwab.  We will probably open his account this week with the $300 he has earned so far and then add to it as the year progresses.  I’ll provide reports later on what we invest in and on how his IRA is doing in future posts.  Stay tuned!

Anyone out there start a custodial IRA?  What has been your experience?

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Empty Nest Insurance- Start Your Kids with a Nest Egg


Today the news is full of stories of children returning home to stay after college.  The recession has certainly made it difficult for some to find jobs.  In some cases parents may also be making their homes a little too comfortable. With few rules, no expenses and no responsibility, who wouldn’t want to stay?

By starting children out early learning about saving and investing, and by giving them a little nest egg with which to start, you can dramatically reduce the chances that they will be knocking on your door, duffel bag in hand after college.

Starting an investment fund can be very quick and easy.  It simply takes a couple thousand dollars and some mutual funds.  If you start a fund about the time they are born, and add to it as they get those checks from relatives early on, and then match their contributions once they start to earn their own money, you can build up a substantial fund by the time they leave the house.  This is money they can then use when they have the unexpected expenses that always occur instead of running up credit card debt.
              

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The first step is to find a fund family with a low enough minimum.  I personally like Vanguard because their funds have very low expenses and the minimums for many of them are only a couple of thousand dollars.

You are looking for a fund that invests in a large number of stocks over a broad range of the market.  Good choices would be a largecap fund such as an S&P500 fund or a midcap or smallcap fund.  Selecting specific sector funds or ETFs is probably not a good idea since you want something you can hold for years rather than needing to move in and out of it, incurring capital gains taxes.


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Once you have selected a fund, simply create a custodial account in the child’s name and send in a check.  (Warning:  When your kids go to college, the college may see the custodial account and expect it to be used for tuition before they’ll kick in financial aid.  If you’re worried about this, keep the money in your name and then gift it to your child over a period of a year or two, staying below the gift tax exemption, when they are near graduation.)  As time passes, add extra money to the fund.  You should avoid the temptation to make many if any changes – you want to minimize expenses and taxes.  Just let it grow with the economy.  If you need to do something, wait for dips and buy more shares.

Once the fund has grown large enough, you should consider selling part and using the proceeds to buy another fund in a different sector of the market.  For example, if you’ve amassed $15,000 in a largecap fund, you may want to sell half and buy a smallcap fund.  This diversification will reduce the risk of losses and smooth out the fluctuations that occur.  In general, different sectors of the market do well at different times.


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Note that capital gains and dividends will be tax-free below a threshold amount, but be sure to check with your accountant on what those minimums are in any given year.  They are generally less for investment income than earned income.  You may also need to file tax returns in some years if the income is large enough even when they haven’t made enough to pay taxes.  Payment of quarterly estimates may also be required.  Minimization of trading, and thereby the realization of gains, will delay the time at which you will need to start preparing tax returns for their accounts.

Once the child reaches 18, the money will be theirs (you have no say over this).  You therefore should have been teaching them all along that the money is there to help them in emergencies, such as when the car breaks down, and not just for day-to-day expenses.  You should also be teaching them to leave the principle alone and just spend the interest/dividends.  In that way, even though they may waste some, hopefully there will be enough remaining when they are older and wiser to help secure their financial security.

By giving your children a nest egg with which to start their lives, you can help keep them out of debt, help them have a down payment for a house when they are ready, and be able to stay out on their own between jobs and other issues. You will also give them an extra source of income that they can use throughout their lives.

 

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Teaching Children How to Be Wealthy


We learn most of our financial knowledge from our parents and usually have similar spending habits.  Unfortunately, money and sex are both subjects that are rarely talked about between generations, resulting in young adults with a poor understanding of both.  By teaching children where money comes from and how to manage it, you can set them on the path to a life of security instead of a life of worry.  Here are important points to cover.
1.  Money can be saved, invested, spent, and given. 
When one receives money, it can be saved, invested, spent, or given.  Saving provides immediate security.  Investing provides multiplication of wealth and future security.  Spending provides current enjoyment and the zest of life.  Giving allows us to grow and become better people.  Children should be taught that an appropriate level of each activity should be part of one’s financial life.
2.  Money is earned by providing something of value to others.
In our Capitalist society, one earns money by providing something of value to others.  Something of value is something that meets their needs.  This can mean operating a business that provides something needed, or working as an employee and providing something your company needs to them in exchange for a salary.  It can even mean digging something up out of the ground that is needed, or refining something into something more valuable.  The more valuable the thing provided, i.e. the greater the need fulfilled, the more money can be earned.  As an employee, the more value you bring to the company, the greater your salary can be.

      
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3.  Wealth and financial security is created by building pipelines.
People who spend all of their wages may seem to be doing well, but they are taking a great risk that something will happen to their ability to produce their wages and end up in financial ruin.  Also, except for the few souls who pass away suddenly, they will eventually not be able to earn their wages due to sickness or there will come a time where they do not want to work anymore.  Financial security is earned by using some of our wages and our energy to create pipelines – investments that provide income to us.  By buying shares of a mutual fund, buying a rental property, writing a book or a song, or building a business we create the ability to generate income without working.  This will both supplement our current income (allowing us to spend and give more) and allow us to replace our income when needed or desired.  Individuals who become wealthy are those who delay the acquisition of things and/or work additional hours while able in order to build their pipelines.

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4.   When we pay interest, we pay for everything twice (or more).
One will never become wealthy while paying 20% credit card interest.  Even keeping a perpetual house payment by constantly withdrawing equity for home improvements and other spending will have a huge impact on future wealth.  Likewise, if one keeps a car payment throughout one’s life, one will forego over a million dollars in wealth at retirement.   If we save up cash and buy things, we will pay substantially less than if we buy things on credit.  This in turn will leave more money for saving and investing.  Loans should be taken out very rarely, and then the debt should be paid off as quickly as possible.

     
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 5.  An emergency fund turns an emergency into an inconvenience and provides more options.
Most people are able to pay their monthly bills, but then sudden emergencies cause them to take on debt.  Eventually, they will have all of their income (or more) consumed before the month starts, making it impossible to save or invest.  By keeping 3-6 months’ worth of expenses in a savings account, the sudden car repair or minor medical issue can be resolved via a check instead of a loan.  Likewise, the loss of a job becomes an issue to work through rather than a crisis.
6.  Save up for big things you will need to buy or replace monthly.
Most individuals will need to take out a loan to replace a car, an air conditioner, or a roof.  Many put vacations on their credit cards and then pay for them over then next several years.  If you regularly save for the big expenses, you will have the money available when the come times.  Not only will this result in savings on interest (which will give you more money to save for future purchases). It will allow you to negotiate for better prices.  Everyone likes cash-up-front, and may people will give you a discount if you can pay in full.
Teach your children about how to handle money, and you will greatly reduce the stress in their lives.

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Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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