Kids Earning Money? Set Up a Roth IRA

I took Nathan and Ryan to our broker this morning to discuss Roth IRAs. Both boys have jobs and I thought it was time to have them begin thinking about their retirement. John and I decided to match any money they made this summer, dollar for dollar, and, well, my boys have never been known to turn down free money. They were all in.

I could have easily set up their custodial accounts online but I wanted the boys to have the experience of meeting with an expert. Besides, I’m not all that familiar with Roth IRAs, I had a few questions to ask, and I wanted them to learn right alongside me.

Our broker started by asking the boys what they already knew about Roth IRAs. Nathan volunteered that it was a retirement account that they wouldn’t be able to touch until they were 65 (turns out it’s 59 1/2). Ryan offered the fact that taxes were taken out before the money gets deposited into the account allowing for the money to be drawn tax-free later on. I was proud of both of them for being able to discuss the basics of these types of accounts.

I know it’s hard for many kids to even entertain the notion that one day they will be retired. It’s even harder to get them to begin to prepare for it. I’ve been lucky in this area with Nathan and Ryan. They’ve sat in enough of my money classes to know that they are in the best position now to set themselves up for financial freedom later in life. A little sacrifice now can pay greatly later.

When our broker started talking about the compounding effect of money, and having money work for them, Nathan and Ryan started to smile. They know all about it. In fact, once kids see the power of compound interest, they’re usually quite interested in making those sacrifices.

We then got into risk management. The question posed both boys was What would you do if your account value dropped by 10%? Sell, stay put, or buy more? It was an interesting question and I was curious what each would say…although I already knew.

Ryan said he’d buy more. Nathan said he’d stay put. Ryan has made a killing on his stock picks this year; he’s a little bit more of a risk-taker. Nathan is simply not willing to lose money if he has a choice. This fits in with the next question: When are you looking to retire? Under any other circumstances this would have been an odd question to pose a 15- and 17-year old. But we were in his office to discuss retirement, so it was totally appropriate.

Ryan wants to have the option of retiring when he’s 40. Nathan said he probably wouldn’t retire any time before 55. With this information, our broker created personal target funds for each of them. Then he printed them out. That alone was worth the 45 minutes in his office. The boys were fascinated with these pieces of personalized information and devoured them in the car ride home. Very cool.

And me, all I could think about in that car ride was how I was jyped of information when I was a teenager. Had I known then what I know now, I’d have left that office in my flip flops ready to head out to the beach and work on my tan.

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Teaching Kids to Set Financial Goals

Long story short, kids who know how to delay gratification tend to grow up to be adults with higher paying jobs, have happier relationships, are physically healthy, and are persistent in their pursuits. Let me know if you want the details to this longitudinal research.

Using money, we have an unbelievable way to help our kids learn to delay gratification. It’s all about setting personal financial goals.

There are three types of goals kids can set:

~to purchase a specific item
~to save a certain amount of money
~to reach a certain account balance

Giving kids a reason to set a financial goal is important. This gives them an incentive and a concrete reason to save. Goals, like saving for a coveted toy, are more tangible to young kids. Tweens and teens can begin to work towards saving a certain amount of money which is can then be used as their investing money. Kids LOVE the idea of doing something as grown-up as investing. And if they see how much money can grow over time due to compound interest, they’re usually quite excited to get saving.

Goal duration should be short for young 5-6 year olds, maybe a week or two. These kids need to be successful in reaching their first goal because it will encourage them to set another one. As they get older, increase the time. You may even want to consider matching them dollar for dollar. Not only is this a good motivator, but it allows them to reach “pricier” goals faster.

Another strategy for getting your kids to reach their goal is to introduce them to some Above-and-Beyond jobs. These are jobs that your kids can do around the house to earn extra money. This has the added benefit of teaching kids the value of a dollar as when they work for money, it tends to have greater meaning.

Having kids set financial goals is the foundation needed for them to be ready to set goals such as saving for a car, or for college, or (it’s baaack) saving for a down-payment on a house. That’s a lot of delayed gratification! But it’s so worth it. You’re teaching your child life skills so necessary in today’s society!

And achieving a financial goal that they set out to do gives kids such a sense of personal satisfaction. It’s a joy to watch as a parent. Let’s not deny our kids (and us!) this opportunity.

Getting Kids EXCITED About Saving Money

When Ryan was seven years old, John and I discovered he had a spending problem. As serious as a seven year old can have. It was all about Pokemon cards. Each week he would drain his money on the cute cards in hopes of striking it rich with a rare Charzard.

But not wanting that spending problem to grow into a bad spending habit, we decided to introduce Ryan to compound interest. We wanted to see if the idea of money growing on itself (because he saved it), would have an impact on him. We also wanted to have the idea of saving his money come directly from him.

So we sat him down at the computer, along with his brother Nathan who was a terrific saver already, and plugged 10% monthly interest (parents can do that!) into a spreadsheet. The graph that was generated on the initial $100 we set up, shocked him. Then on came the lightbulb when he realized that saving his money would mean he would end up with even more money. He was a believer. It was this moment that began our work on KidsSave.

Compound interest. Einstein, a very smart dude, called it the eighth wonder of the world. He also called it the greatest force in the universe. And if anyone should know about the universe and force, it’d be Einstein.

And it was compound interest, interest that grows on itself, that made Ryan the saver he is today.

So I’ve put together two videos to illustrate the power of compounding so that you can show your kids this “magic” and get them just as excited as Ryan got. Of course, you could also use our kids’ savings and money management software, KidsSave, as it was the very first thing we designed for the program.

Here’s my most recent video. It’s on the Rule of 72. Don’t know the beauty of the Rule of 72? Then take a peek. It’s pretty amazing. And if it gets your kids excited about saving, let me know!

And after you watch the video, ask your kids what would happen if they invested $2000 instead of $1000…

Watch this VERY COOL video.

Yippee! I’ve Got Money! A Letter to Teens

I was asked to contribute an article to a book being published on kids and financial literacy (will share more on that later). Apart from being thrilled to have been asked, I happen to love writing, so I jumped at the chance. My given topic was ‘kids and budgeting’ and is a little longer than I usually post. But I think you’ll find it easy to read. Here we go:

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Nice. You’ve got money. And if you’re like most teens, the first thing that comes to mind is to take that money and spend it. That’s reasonable. After all, you worked hard to get it. You did work hard to get it, didn’t you? But before you call all your friends and set up a date with the mall, ask yourself one question. Do I want to think like a millionaire or do I want to think like someone who lives with mom and dad when they’re 30?

You’re pretty savvy, so my guess is that you chose to think like a millionaire. Good. Because you’re going to learn some important stuff that will allow you to build wealth so that you can have and do the things you want. But always keep one thing in mind. Being rich in money is nice, but it’s also important to be rich in friends, compassion, knowledge, generosity… Then, being rich in money is so much more meaningful, for you and others.

Okay, we’ve got priorities straightened out. Now let’s get to the thinking-like-a-millionaire part. Most millionaires become millionaires because they are savvy in the art of managing their money. And the first thing millionaires do when they manage their money is to pay themselves first. It seems like a silly thing to do since the money is already theirs, but paying themselves, or in this case, yourself, first simply means that you are going to take some of your money and sock it away into savings. Then leave it there. No touchy the money. You’ll see why this is important in a minute. So decide, right now, how much of your money you will put into savings each month. A lot of millionaires started by putting aside 10% of their income. But you decide what works for you right now. You can always add more later.

Okay, pay myself first. Check.

Next, it’s always a good idea to share a little of what we have. Some like to give to their church, others like to donate to causes that are near and dear to their hearts. Whatever you choose, decide how much you want to give and how often you will be giving. It’s often easiest if you do it monthly, similar to how you put money into savings. And, hey, your parents may even be willing to match your donating dollars. They like it when they see you doing things to help others. So ask them.

But does that mean that you have to give money? No. Giving of your time and energy is just as valuable. At some point, though, maybe when you’re earning just a little bit more, you’ll want to re-visit this and make a commitment. Either way, you’ll discover a very important thing. Sharing makes people happy. And being happy is contagious. So share. It’ll make the world a better place.

Share time or money. Check.

Now, since you are a millionaire-in-the-making, you need to figure out where your money is coming from and where it is going. In other words, you’re going to track your income (money in) and expenses (money out). It’s going to take one month to gather enough information to be able to see patterns in your habits, so grab a notebook, use KidsSave or print out a recording sheet by visiting here and start recording. Every single penny you spend or bring in gets recorded. Yes, I know, it’s a hassle. But it needs to be done. Think: millionaire.

Then, when you have one month’s worth of data, look for patterns in your spending habits. If you like, you can create categories using colored pencils. (If you used KidsSave, print out your registry.) Items like soda, chips, and gum would go in a ‘snack’ category and can all be colored, say, yellow. Video games, itunes, and that new Wii controller you just bought would go in an ‘electronics’ category and colored…red. You get the idea. Expenses that are the same each month like your cell phone bill, remain in their own category. They are fixed expenses. And remember your charity and automatic savings? Consider those fixed expenses, as well.

Add up the totals for each of your expense categories. Then add up all the categories in expenses. That’s about how much you spend each month. Next, add up all the categories in income. That’s about how much you bring in each month. Subtract expenses from income. That’s how much money you have left over. No, duh. Want more money left over? Keep reading.

Keep track of my income and expenses. Check.

Okay, so you’re interested in ending up with more money. The good news is, it’s not that hard to do. And it can make a huge difference in whether or not you reach millionaire status and how quickly you get there. Here’s how.

Go grab that list of expenses you carefully recorded for one month; it’s time to take another look. This is where it can get interesting, so hang on. Choose one of the categories, like electronics, and look at the total amount you spent during that month. Now multiply that number by 12. That’s about how much you can expect to spend on electronics for the entire year. Do that with the other expense categories. Pretty eye-opening, huh? Time to reduce spending?

Start by taking a real close look at all the things you spent money on. Not happy about blowing a bunch of money on snacks at the mall? Great. Stop doing it. Wish you hadn’t bought those funky sunglasses that you never wear? Then think twice about putting out money for things you don’t really need. Not that you don’t get to have some fun with your money. Treating yourself is important. Just be aware of where your money is being spent. There’s a saying that goes “It’s better to tell your money where to go than to ask it where it’s gone.” So pay attention.

Alright, reduce spending. Check.

Okay, are you sitting down? Because this is the part where I bring up the ‘B’ word. Adults do not like this word. A lot of them even cringe when they hear it. But you’re not afraid. You’re a millionaire-in-the-making which puts you into the tough category.

Deep breath.

Budget.

Budget? Yup, budget…a plan for your money. It’s hard to become a millionaire without one so let’s just hit it straight on. Besides, when you see what’s really involved, you’re going to wonder why so many adults haven’t taken the plunge.

The first thing you need to do is track your income and expenses. Done. Then you need to create income and expense categories. Done. Next, you need to subtract your expenses from your income. Done. OMG! The budget’s done. No kidding. You just need to make sure that you’re meeting all your objectives of saving and spending carefully and that, then, pretty much sums up how to create a budget. Sheesh, what’s up with these adults?

Create budget. Check.

So, when you created your budget you discovered some extra money. Money that was left over after you subtracted your expenses from your income. Beautiful. Now we get to the fun part, the building-wealth-to-become-a-millionaire part. The part where you learn how to make money work FOR YOU, instead of you working for it.

Remember that pay-yourself-first money you’ve been saving? Here’s where it comes into play. You’re going to take that money along with the extra savings you just found in your budget and begin to invest it. But here’s the deal. The money you invest is money that you won’t be able to touch for awhile. I’m talking several years. In fact, the longer you can leave it alone, the better. Let me give you a quick example.

If you started saving $100 every month when you were 18 years old, and you invested it where it received 6% annual interest, by the time you turned 65 you would have $313,187. If you did the same thing but were receiving 10% annual interest, you would end up with $1,281,919. The secret is something called compound interest. Compound interest is money that grows on itself. Remember Einstein? Pretty smart, right? Well Einstein knew how special compound interest is. He called it the greatest force in the universe. Over time small amounts of money become large amounts of money. And if you keep making contributions while not touching any of it, yowza, it’ll take off like a bat out of H – E – double hockey sticks. Sick.

And what should you invest in? Lots of things. The key is to diversify. That’s when you divide your money into different investments. CDs and bonds are a good place to start. I also recommend mutual funds. When you’re ready you can begin investing in individual companies in the stock market. And maybe one day you’ll move on to real estate. But do your research first. Always do your research. http://Www.bankrate.com and http://www.fool.com are great places for that.

Begin my investing portfolio. Check.

Well there you have it. You’ve just set yourself up to become a millionaire. You are in control of your financial future. How cool is that? It’s very cool because that puts you into an elite group of people. A group of people with a millionaire mindset. You’re on your way to great things. Keep focused. Know your goals. Follow your dreams. Go get ‘em!

Fees Make a Difference

I was so excited this morning after reading an article in the business section of the Sacramento Bee.  It was describing how Wal-Mart is having a positive impact on the environmental practices of companies it does business with, particularly in China.  Apparently, if you want to partner with Wal-Mart, you’re going to have to be eco-friendly.  Nice.

I was excited because Nathan owns a share of Wal-Mart and when a company does good things, it usually ends up being reflected in the stock price.  Eventually.  Besides, being eco-friendly really is a good thing for the planet.

Nathan chose to invest in Wal-Mart for this very reason.  He liked their focus on socially conscious practices.

I handed Nathan the article to read.  I deliberately don’t tell my kids what the article is about because reading the newspaper, especially the business section, is a skill.  Heck, sometimes I have to read an article several times before I get the gist.

But Nathan got this one right away.  “I knew it,”  he said.  “They’re doing good stuff for the environment.”

And then he looked a little sad.  “Let me see what it’s at now,” he said as he left his Facebook page to check the latest share price.

“It’s at $54.  I’ve got a ways to go.  I bought one share at $50 plus the transaction fee of $12.95.  So it’s going to have to go up to $63 before I break even.”

Okay, these are the times when I wonder what kind of guidance I gave him when he wanted to buy in.  I’m very aware of the fees and that in making a purchase, they need to be taken into consideration.  Especially if only a few, or in this case, one share is being bought.

Since I’m the one who sits with the kids at the computer when we make our purchases, I can only wonder what planet I was on to allow him to purchase one share which, in effect, plummeted as soon as the purchase was complete.  I felt really, really bad.  Some guidance I was.

But, it was a good lesson.  Although the fees have since gone down to $7.95, it’s still an important factor in making purchases.  A factor that neither one of us is going to forget the next time we decide to own a little piece of a company.

A Blog Worthy of John

As I jumped up from the dinner table last night to jot down something that Nathan had just said about all the extra packaging that things come in (he’d rather save the money than have it spent on stuff that gets thrown out), John announced that he was glad he was not blog worthy.  My poor kids have to put up with a lot in the name of teaching  kids financial literacy.

Actually, John is very blog worthy.  I’ve just been focusing on the kids.  So this one’s for him.

As it so happens, later that night Ryan was talking about his investments.  He has $1500 in his savings account and I had mentioned earlier in the day that he might want to think about taking some of it and investing it.  He already owns shares in Chipotle, Costco, and Netflix and has a Vanguard 500 Index account.

John is a very deliberate thinker.  The first thing he asked Ryan was about his upcoming car purchase.  Ryan will be in the market for a car next year. 

“You need to consider your time line,”  John told him.  “You don’t want to put money that you’re going to need soon in an investment that’s meant for long term.  Like the stock market.”

Ryan responded with, “I don’t want to invest in CDs and bonds.  You don’t get much back from those.”

He’s right.  I’m not sure those could keep up with inflation right now.  But it is a secure investment and he’d get a little more than if he kept his money in his savings account.  When John realized, though, that Ryan was leaning a little towards choosing another stock he reminded Ryan that he’s taking on risk and will need to do his research.

John also talked to Ryan about balancing his portfolio.  “You don’t want to have all of your money in the stock market.  It’s a matter of percentages.  You need to figure out what percent of your money you want in stocks, what percent in mutual funds, and so on.”

This weekend the two of them are going to take a look at Ryan’s portfolio.  I don’t know if Ryan will, indeed, put some of his money into the market.  But I do know that if he does, I will follow suit.  So far, Ryan’s investments have done very well by him.

Investing 101

I just finished reading the book, Investing 101, by Kathy Kristof.  I consider myself somewhat knowledgeable about basic investing…enough to have a diversified portfolio.  And certainly enough to be able to have investing discussions with the elementary and middle school students I work with.

But continued education is always a good idea.  Besides, in the financial world, things change so it’s important to keep up with them.  After reading the book, I gave myself a pat on the back…not because I finished it, it’s actually an easy read, but because John and I have been doing many of the things she suggested.

One area that really made an impression in terms of things I should discuss with my students, was inflation.  Although putting money into CDs and bonds are great first investments for kids, over time they will not keep up with inflation.  And since kids have all the time in the world, getting them investing in mutual funds and individual stocks early on is a pretty good idea.

In the book, Kathy reminded us to keep our emotions in check when investing in the stock market.  “Have a plan”, she wrote.  “Decide what the price will be when you want to sell and then stick to the plan.” 

This reminded me of Ryan when he bought his Chipotle shares.  He had decided that when they reached sixty-something he would sell several shares and buy in to Costco.  And that is exactly what he did.

But what really amazed me about Ryan’s story was that after he sold his Chipotle shares, the share price continued to go up.  He seemed unnaturally okay with that.  But he had set his plan, followed through, and not looked back.  Wow.  If I was honest with myself I’m pretty sure I would have spent some time brooding about selling too soon.  Perhaps I need to listen more to my own lesson about not getting emotionally attached.  Seems Ryan is already one step ahead of me in that area…and a bunch of other areas…