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.

 

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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.

A Response to the Me-ternity Leave Columnist


Are They Growing Up While You're on Your Phone?In her article in the New York Post,  “I Want to Have All of the Perks of Maternity Leave – Without Having Any Kids,”  Meghann Foye talks about how she felt it was unfair that new mothers get paid time off for maternity leave, while she and others who chose not to have children didn’t get the same.  She proposes that women (and maybe men) should get some time off for reflection that she calls “me-ternity leave.”

Now I feel the eye roles from millions of parents out there and yes, she does appear to be that clueless.  While she seems to think that new mothers are home, sipping coffee in light-bathed sunrooms while reading the paper (having slept in until late morning) while their newborn child sleeps peacefully in a room down the hall, only waking periodically to coo and do cute baby things, mothers and dads can both attest that the weeks and months after having a new child are anything but peaceful.  Getting sleep 2-3 hours at a time, trying to cram food down during the brief moments you have, and always walking around with a little bit of spit-up on you shoulder (because it happens so often you no longer bother to change or even wipe it off) is not conducive to deep self-reflection.

And that’s where Ms. Foye really misses the whole point, probably precisely because she has not had kids herself.  In fact, she has it exactly backwards.  Once you have children, you go from worrying about yourself and yourself being the focus of your attention to the children being your focus.  You start to watch kid shows, read kid books, wake up at kid hours, (once they get old enough) go to kid movies, and take vacations where you look for kid activities.  I barely noticed the playgrounds at parks before I had kids but they became the focus of my life for many years.  Maternity (and paternity) leave isn’t about taking time away from work to focus on yourself and look at the direction of your life.  It is to figure out how you will need to change your routines now that you have someone in your life that will take your constant attention.

I remember just looking at other people in restaurants, just sitting there waiting, and thinking how wonderful it would be to just sit.  Looking back, I wish we had eaten out less and maybe just done take-out when we didn’t feel like cooking because going to restaurants was usually a terrible experience between fighting the children to stay in their seats and the inevitable rush to the parking lot with a screaming child just as the food arrives.  Actually, we used to fight over who got to cook most nights since it was a break from constantly addressing our childrens’ needs.

I remember thinking as I rocked my son late at night how after he had grown and was out of the house, I could start to do things again.  But then I realized that by the time that happened, I would not be wanting to do the same things.  I wasn’t gong to go to the dance clubs when I was fifty.  I wasn’t going to go play spend the weekend mountain biking with friends.  That part of my life had ended and a new part had begun.

I started to realize some other things about work as well.  I’m guessing (perhaps incorrectly) that Ms. Foye looks down her nose at women who stay home to raise the children.  I’m just guessing this given what she thinks maternity leave is like.  Really, raising children (for those who have the capability to do so) is one of the most important jobs there is.  We seem to lose sight of the fact that we go out and work to bring home money for our families.  It is like we have all decided that the people who leave the cave and hunt have the important role, such that everyone wants to go out and hunt.  But we forget that the whole reason we’re hunting is to take care of the children back at the cave.

Now I’m not saying that the mother needs to always be the one to stay home.  Really the decision is a combination of who has the better paying job and who has the capabilities to  do a good job raising the children because that is the more important and difficult job that many people are not suited to do.  In a year, few people will remember anything someone does at the office.  Certainly in twenty years almost everything will be forgotten and the presentations that were made will have been deleted.  But the children will continue to make an impact on the world, good or bad, and a big part of that impact is due to the work of the person who raised them.  We’re already seeing the impact on the world of children who were raised by no one.

Being the primary parent is also far harder than many jobs.  Now I’m not talking about people who stay home, but let the TV raise the children while they go on about their lives.  I’m talking about parents who spend the day taking care of the children, dressing them, teaching them, finding activities for them to do that expand their experience, correct them when they act inappropriately and encourage them when they do well.  It takes enormous patience, enormous energy, and enormous sacrifice to be a truly great parent.  There is nothing “me” about being a great parent – it takes giving totally of yourself.

But when you truly do, you start to realize how incredibly unimportant all of those other things that once filled your world really are.

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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.

What do you think?  Please leave a comment?

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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.