Tips for How to Educate Your Kids (or Grandkids) About Money – Part 1

Tips for How to Educate Your Kids (or Grandkids) About Money – Part 1

I am frequently asked for my advice about educating kids (or grandkids) about money. My wife and I developed a set of “money rules” for our two boys. I thought I would share a few more of them with you. For us, these “money rules” were built around making sure our boys understood the value of money and learning how to manage it.

Allowances

Let allowances be a lesson on earning money and not just something your kids learn to expect. Pay your kids or grandkids a weekly allowance equal to their age. But, set parameters. For example each child must give away at least 10% of their allowance to charity and 10% needs to be set aside for long-term savings. The rest is available for spending, short-term saving for a purchase that costs more than one week’s allowance, or adding to their long-term savings. This allowance isn’t paid for specific chores, but operates under the assumption that the child must be a contributing member of the family with responsibilities appropriate for their age. If they don’t uphold those responsibilities, you reserve the right to deduct money from that weekly allowance.

Cars

Use the purchase of a car as a lesson on how to manage money and save for large purchases. Encourage your children to save for a car that they can buy on their own at the age of eighteen. If an extra car is important to help larger or busy families with transportation needs, one idea is to buy a family car that the parents own, but the kids can borrow. Sometimes, buying a car for your child or grandchild fits in certain circumstances, like excellent grades or earning a college scholarship. This allows for the car to still be received as a sense of pride and accomplishment — if not from monetary savings, in another form of hard work or achievement.

Long-Term Savings

Help your kids or grandkids set up a savings account that they can’t dip into unless it’s for their long-term savings goal (such as that car they want or college tuition). I recommend a UGMA (uniform gift to minor accounts) also known as UTMA (uniform transfer to minor accounts). A parent typically serves as custodian for the account until the age of eighteen. As the parent, you can monitor the account and share the monthly statements to keep your kids informed. They will ask questions when they are ready, and that’s the best way to learn.
For more financial advice, get your copy of Brian Fricke’s book, Worry Free Retirement.

Incredible Retirement Tip: What Your Financial Planning Software Is Missing

incredible retirement tip

If you or your financial advisor use financial planning software to help manage your portfolio, you’re almost guaranteed to fail. Let me explain. These programs seem logical. You plug in the amount of money you have now, how much you’re saving, when you want to retire, how much you expect you will spend in retirement, etc. The program then makes its calculations, based on an assumed life expectancy and an assumed average annual return.

This is the inherent problem with these software programs. The notion of a guaranteed average annual return over a number of years is simply foolish. To clearly show my point, look at the chart below. It shows two different accounts. One account has a 5% average annual return and the other has a 10% average annual return. The same amount of money is withdrawn from each account every year. It would seem logical that the 10% average annual return account would be the better account. However, this is not the case.
annual return chart

As you can see, the account that only earned a 5% annualized return over the last ten years is actually worth more at the end of ten years.

How could this happen? The ending portfolio holdings are based on the yearly return and when it occurred. For this reason, the simple projections in most planning software are not effective. Instead, you need a more complex tool that allows you to review many types of analysis that mix up the yearly returns, both the amount of the return (profit or loss) as well as the order in which they are received.

Contact us to make sure your portfolio is set up for success.