Learning the Value of a dollar!
Teaching Kids To Save & Invest Wisely
By Gary D. Halbert
It doesn't matter if your kids or grandkids are adolescents in their early teens or if they are grown adults of any age. We are never too old or too well off to save and invest wisely.
At my company, ProFutures Investments, we frequently have the opportunity to speak with our clients' adult children. In some cases, the adult children are fairly knowledgeable about investing, but in most cases, they are not. It seems to us that talking to their children about how to invest their money must be uncomfortable for many parents. That's unfortunate because the learning curve in investing can be expensive, and years of compounding can be lost.
Play Road Trip to Savings
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As this series on teaching your kids how to save and invest develops in the weeks and months ahead (and on no specific schedule), I will discuss various issues ranging from how to encourage your kids to save more, how to teach them to invest, how you can transfer assets to your kids and minimize estate taxes, at what (children's) ages you should leave your inheritance to your kids and more.
Most of you will want to save these E-Letters on saving and investing and encourage your children or grandchildren to read them. I will write them in my usual easy-to-understand style that even a well-educated teenager can comprehend. So let's get started in what I hope will be some of the most useful information I have ever provided you. Your feedback and personal experience is most welcomed.
First, My Own Story About Saving
Saving Money is a Snap
I grew up in a lower middle class family in the country outside of Lubbock, Texas. Like many young kids, I dreamed of one day being rich. My parents encouraged me to do well in school so that I could grow up to be a doctor or lawyer or some other profession that would afford me a better lifestyle than their own. And they taught me to save.
I don't recall exactly how they did it, but they continually encouraged us to save. I do remember that my father always had a stash of "emergency money" whenever unexpected events popped up. Even though he didn't make that much money at his job, he always found a way to put away a few hundred bucks in his stash every month. That roll of hundreds looked like a fortune to me as a kid! I wanted one for myself, and this motivated me to save early on. And I've always kept a stash of cash myself.
My parents always encouraged me to work and make money, even as a child. From the time I was about 10 years old, I worked at a neighborhood horse stable after school, on the weekends and in the summers. I did everything from cleaning stalls and shoveling horse manure to grooming horses to teaching other kids to ride horses. I loved the work -- it made me feel more like an adult. But more than that, I loved having my own money.
By the time I was a teenager, I had saved enough money to buy a couple of young colts each summer. Over the fall and winter, I would saddle-break them and teach them to become barrel racing horses, and then I would sell them the next summer, usually to the city girls who boarded their horses at the stable where I worked. I made a handsome profit on each horse I sold.
One of the things my parents always told me is that I would have to pay for my own car, when that day came, and this was a big incentive for me. When I turned 17, I had my Dad drop me off at the local Dodge dealership in Lubbock. I went in, looked around, and decided to buy a brand new 1969 Dodge Charger R/T. When I told the salesman I wanted to buy the car, he told me I would need to get my dad or mom to come in.
I told him I didn't think so. I pulled out 40 one-hundred dollar bills and told him that was what I would pay. About an hour later, and another couple of hundred dollars or so for tax, title and license (TT&L), I drove out in my first new car. And it was HOT!
In the summer of my senior year in high school, I got a job driving a bobtail truck back and forth between Lubbock and Amarillo. The pay was good for those days. I was able to keep that job even as I entered college at Texas Tech University, and it paid for most of my college education. The only time I didn't work, at least part-time, during college was the year I spent earning a Masters Degree in International Business.
Tools For Teaching Children About Money
Teaching Your Kids The Importance Of Saving
It is my opinion that, as parents, we have an obligation to teach our kids about saving and financial matters in general. I believe that teaching our kids about saving and financial matters is just as important as teaching them honesty and integrity, and even sexual matters. Yet, as is the case with sex, many parents are uncomfortable teaching their kids about financial matters.
I believe this is a big reason why we have a savings crisis in America. In the first half of 2005, the national savings rate fell to ZERO, down from a high of over 10% in the early 1980s. By the end of last year, the national saving rate had fallen into negative territory, -0.5% according to the Commerce Department. The Commerce Department calculates the savings rate by taking the difference between after-tax income and all expenditures, including housing, food and clothing.
Every three years, the Federal Reserve conducts an in-depth consumer survey called the Survey of Consumer Finances. These surveys glean lots of data on trends in consumer saving and spending. The latest report for 2007 found that only 47.2% of all households actually save on a regular basis, and in reality, that number may be high. In addition to the negative savings rate, the American Bankers Association reports that the average US household has over $8,000 in credit card debt. Credit card abuse by college students is epidemic.
I could go on with troubling statistics on debt and the lack of savings, but the point should be obvious. If we are going to educate our kids about the importance of saving, we must not only teach them, but we must also practice what we preach. Kids whose parents don't save are not likely to be good savers either.
Motivating Your Kids To Save
Teach Children about Money (ages 4-8)
- Alexander, Who Used to Be Rich Last Sunday by Judith Viorst
- Deena's Lucky Penny (Math Matters Series) by Lillian Hoban
- The Berenstain Bears' Dollars and Sense (First Time Books) by Stan Berenstain
- The Berenstain Bears Get the Gimmies (First Time Books) by Stan Berenstain
- The Berenstain Bears' Trouble with Money (First Time Books) by Stan Berenstain
- Bunny Money (Picture Puffins) by Rosemary Wells
- Deena's Lucky Penny (Math Matters Series) by Barbara Derubertis
- A Dollar For Penny (Step-Into-Reading, Step 2) by Julie Glass
- Follow the Money! by Loreen Leedy
- The Go-Around Dollar by Barbara Johnston Adams
- If You Made a Million by David M. Schwartz
- The Monster Money Book by Loreen Leedy
- My Rows and Piles of Coins by Tololwa M. Mollel
- The Penny Pot (MathStart 3) by Stuart J. Murphy
- Pigs Will Be Pigs: Fun with Math and Money by Amy Axelrod
- The Story of Money by Betsy Maestro
- Teach Your Child About Money
My wife, Debi, and I have two kids, a son 16 and a daughter 14. There are many ways to motivate kids to save, especially young kids. For a variety of reasons, our kids are voracious savers as I will discuss below.
Probably the most common way parents encourage their kids to save is by paying them a weekly or monthly "allowance." Parents can encourage the kids to save some of their allowance each week or month, or they can require them to do so, and in what percentage.
Debi and I wanted to create an incentive for our kids to save well beyond an allowance.
As soon as our kids were old enough to understand saving, we agreed to MATCH whatever they saved. If they bring us $20 to put in their savings account, we match it and deposit $40 in the account. You can set the "match" at any level you want, not necessarily 100% as we do; it can probably be just as effective if it is only 50%, or even less.
We made it clear from the beginning that this was their money, in their own separate accounts, but once they put money into the savings account, they could not spend it without our approval. We do allow them to keep "spending money" outside the savings account for day-to-day expenses, etc. We told them from the beginning that their savings would one day be used to buy a car, pay for college expenses, etc. As noted above, they have become very serious savers. In fact, they have never asked to make a withdrawal from their savings accounts to purchase anything, and they are very frugal even with their spending money.
As an example, the only thing our son wanted for Christmas last year was the brand new X-Box 360 (a video game) that cost $400 at the time. Debi and I were not about to spend $400 on a video game, so we gave him $300 cash for Christmas and told him if he wanted to buy it, he would have to use $100 of his own money. As much as he wanted that game, he would not spend $100 of his own money. And he still hasn't to this day. Our daughter is the same way. Good for them!!
Matching what your kids save may not be right for you. Also, not all kids can stay focused on a long-term financial goal like a car. If this is the case, you can use shorter-term incentives of many different types. There are many ways to encourage and motivate kids to save money. I will recommend a very good book later in this E-Letter that has many additional ways to encourage your kids or grandkids to be good savers.
Finding Ways For Kids To Make Money
In order to motivate young kids to save, you also have to find ways for them to make money. Early-on, Debi and I made it clear to our kids what types of chores around the house and the property were "unpaid" as a member of the family, and which chores were "paid." We live on several acres on Lake Travis (outside of Austin), and have a boat dock on the water, so there are always lots of chores, yardwork and maintenance the kids can do to earn money. They also do work for other people from time to time.
About this time last year, one of the vice-presidents at ProFutures approached me and asked if the marketing group could hire my son to do some computer analysis for them during the summer. I agreed but added that he must work for them, not me, and that he was to receive no special treatment or favors for being my son. He quickly proved that he could crunch numbers and analyze money managers' performance data faster than anyone on our staff. He soon received a nice raise and has been asked to return again this summer. By the way, he put almost all of the money he made last summer into his savings account, knowing he would be hoping to buy a car this year.
You might be thinking that our situation is unusual in that Debi and I own the business and therefore have the ability to "make" work for our kids. But the fact is that our company needed some part-time computer help, and we would have likely hired some other young person to do the work. And this leads me to the next point.
Lots of companies can use some part-time or full-time help in the summers. Most teenagers these days have good computer skills that could land them a better part-time job than working in most retail outlets, mowing lawns or other common summer jobs. Have your kids or grandkids consider mailing flyers and resumes to nearby businesses advising them of their skills and availability.
There are some inexpensive books on the subject of finding summer work for teenagers:
- Teens and the Job Game: Prepare Today - Win it Tomorrow by Beverly F Slomka MS Ed
- Kids Can Make Money Too!: How Young People Can Succeed Financially--Over 200 Ways to Earn Money and How to Make it Grow by Vada Lee Jones
- What Color Is Your Parachute for Teens: Discovering Yourself, Defining Your Future by Richard Nelson Bolles
- Summer Jobs and Opportunities for Teenagers: A Planning Guide by Molly Delano
Get Your Kids Involved In Investing
Once your kids have a handle on saving money, the next step is to teach them how to start investing their savings. Unfortunately, many of my kids' friends know absolutely nothing about investing. Many know very little about the stock markets, the bond markets, mutual funds and what have you. In addition to motivating them to save, and providing ways for them to work and make money, it is also very important to teach them about investing. In fact, I believe it is an obligation of the parents to teach their children about investing.
There are various ways to get your kids involved with investing. By all means, you should share with them your philosophy on investing and explain why you hold the investments you do, and in what proportions. Teach them how to read account statements. Explain to them what brokers are and what they do. Ditto for Investment Advisors. Teach them about mutual funds, etc., etc.
There are two really good books I would recommend to you as parents or grandparents. The first book — Money Sense for Kids by Hollis Page Harman, an outstanding book intended for 8-13 year-old children learning all about currency. The second book — The Wealthy Barber by David Chilton -- is an Excellent beginners guide to financial planning you should have your teenage (or older) children read.
Learn About Money and Finances
How & When Kids Should Begin Investing
There are differing opinions on when to have your kids actually start investing their own money. Kids are really smart these days, and my view is that they should be investing by the time they are in their mid-teens, if not even earlier. While kids should keep some of their money in a risk-free savings account, in most cases the lion's share of it should be in the market.
Some parents choose to "kick start" the process by funding an investment account on behalf of their children, usually through the Uniform Gift To Minors Act (UGMA) or the Uniform Transfer To Minors Act (UTMA), either at a brokerage firm or a mutual fund family.
However you and your kids choose to get started in investing, you must teach them that any non-guaranteed investment carries some level of risk, and that losses will occur from time to time. It is important to discuss -- in advance -- what levels of losses are acceptable, and what levels are not. In fact, if large losses result, this can actually turn kids off to investing in anything that carries any level of risk. So, make sure they understand that they are investing for the long, long haul.
Learn More About Money
Some parents actually let their kids take a crack at picking individual stocks. However, since kids are not likely to have any more success picking individual stocks than most adults do, I generally do not recommend this approach. Rather than picking individual stocks, or following a broker's advice, I recommend having your kids invest in equity mutual funds, after having educated them about the value of professional management and diversification.
There are, of course, thousands of equity mutual funds out there, and it can be difficult to decide which funds your kids should invest in. Fortunately, there are services like Morningstar and others that can help you with fund selection. Of course, there are many companies like mine that will give you direction in selecting the mutual funds in which to invest.
In addition, many of the better performing mutual funds have minimum investment requirements of $2,500 or more, far above what many kids have saved up, and many also charge up-front "loads" on top of that. Programs like Morningstar and others can help you to select among only no-load funds with specified minimum investments amounts that are in line with your kids' savings.
Kids with larger investment portfolios, either through diligent savings or gifts from parents and grandparents, can begin to diversify among various mutual funds. My own kids fall into this category, and we have chosen to invest in the "Absolute Return Portfolios" sponsored by my company.
Our Absolute Return Portfolios consist of carefully selected mutual funds that have delivered good returns in just about any market environment -- up, down or sideways. Past results are not necessarily indicative of future results.
Most of the mutual funds that we use in our Absolute Return Portfolios have minimum investment requirements of $2,500. However, because my company is a Registered Investment Advisor and buys and sells mutual funds at the "institutional" level (rather than retail), the minimum investment in these funds is much lower (typically $1,000 instead of $2,500) to our clients. Likewise, the front-end loads that may be charged at the retail level are not charged to our clients.
Best of all, if a particular mutual fund experiences a manager change or otherwise falls out of favor, it will be automatically replaced by ProFutures without my kids, or our clients, having to take any action on their part. I have been in the investment business a long time, and I think our Absolute Return Portfolios are one of the easiest ways to get exposure to actively managed mutual funds with a history of producing positive returns in any kind of market environment.
Absolute Return Portfolios -- Take A Look For Yourself
With no obligation whatsoever, you can learn more about the mutual funds we have selected for our Absolute Return Portfolios. I think you will want to know how we selected our mutual funds after analyzing thousands and thousands of funds.
Whether it is for you, or for your kids or grandkids, I believe you will find these mutual funds quite impressive in that they have done well in most all types of market environments.
As always, you can call us toll free at (800) 348-3601 or visit ProFutures for more information.
Normally, the minimum investment requirement to participate in our Absolute Return Portfolios is $15,000. However, in order to make this program available to younger investors, we have reduced the minimum investment to only $10,000 for a limited time.
Parents can "gift" up to $12,000 to their kids annually ($24,000 if both parents donate) with no tax consequences. This money can be used to fund investment accounts to get your kids started in our professionally managed Absolute Return Portfolios. That is precisely where I have the bulk of my kids' money invested. Think about it.
I believe that as parents, we have an obligation to teach our children the importance of saving. Likewise, we need to find ways that our kids can work and make money to add to their savings. And in my view, we also have an obligation to teach them how to invest wisely, whether they are teenagers or adult children.
You may want to consider funding investment accounts for your children, whether they are minors or adults. As discussed just above, I recommend professionally managed investment programs, especially for minors. If you would like more information on doing so, be sure to contact us.
I hope this week's information helps. Feel free to share this information with anyone you feel will benefit from it.
In the next article in this "Saving & Investing Wisely" series, I will focus on your adult children and ways to encourage them to be better savers and wise investors.
Very best regards,
Gary D. Halbert
More Smart Money Ideas
- Teach Your Child About Money
- Jobs for 13 Year Olds: 51 Unique Ways to Make Money
- Allowance Make Over
- Part I: Teaching Kids To Save & Invest Wisely
- Part II: Teaching Your Adult Children To Save
- Your 20s: See How Your Wealth Measures Up
About the Author:
Gary Halbert is the president and CEO of the ProFutures companies, a diversified investment advisory firm located in Austin, Texas. ProFutures offers professional financial planning services to a nationwide base of clients. Mr. Halbert's firm specializes in tactical investing, and its recommended investment programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call (800) 348-3601.
Forecasts & Trends E-Letter is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert and may change at any time without written notice.
This article was originally published in
Forecasts & Trends.
Copyright © 2006-2010 ProFutures Capital Management, Inc. All Rights Reserved.
Updated December 29, 2012