Teaching Your Kids to Save & Invest Wisely
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Teaching Your Kids The Importance Of Saving
2. Motivating Your Kids To Save
3. Finding Ways For Kids To Make Money
4. Get Your Kids Involved In Investing
5. “Gifting” Money Or Assets To Your Kids
The matter of teaching children to save and invest is important to me because we often 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 for investing can be expensive, and years of compounding can be lost.
Given that this issue is so important, we will revisit some of the key points on teaching your kids how to save and invest, such as 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, and at what (children’s) ages you should leave your inheritance to your kids and more.
Many of you will want to save this E-Letter on saving and investing and encourage your children or grandchildren to read it. I will write what follows in my usual easy-to-understand style, so feel free to reprint this letter and share it with others you feel it may help.
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 about honesty and integrity, and even sexual matters. Yet, as is often the case with sex, many parents are uncomfortable teaching their kids about financial matters.
I believe this is a big reason why we have had a savings crisis in America. In 2005, the national savings rate fell to ZERO, down from a high of over 10% in the early 1980s. In more recent years, the national saving rate actually fell into negative territory before the trend began to reverse itself in 2008 in the wake of the credit crisis. The point is, 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
There are many ways to motivate kids to save, especially young kids. Probably the most common way parents encourage their kids to save is by paying them a weekly “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.
Both of our kids are in college now, but when they were young, Debi and I wanted to create a better incentive to work and save than an allowance (in fact, we never gave them an allowance). As soon as our kids were old enough to understand saving, we agreed to MATCH whatever they saved from the money they earned. If they brought us $20 to put in their savings account, we matched it and deposited $40 in the account. You can set the “match” at any level you want, not necessarily 100% as we did.
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 did 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 a result of this arrangement, both kids were eager to find work they could do to make money, both at our property and for neighbors. As noted above, they quickly became very serious savers. Best of all, they never asked to make a withdrawal from their savings accounts to purchase anything, and they are very frugal with their spending money to this day.
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 or college. 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 work and 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 we would pay them for. We live on several acres on Lake Travis (outside of Austin), and have a boat dock on the water, so there were always lots of chores, yardwork and maintenance the kids could do to earn money. They also did work for other people from time to time.
A few years ago, the senior vice-president at my company approached me and asked if the marketing group could hire my son to do some computer analysis for them during the summer. He is quite the math/computer whiz. 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. Best of all, he saved almost all of the money he made, and the staff asked him to return the next summer.
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 summer. 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.
Here are some inexpensive books on the subject of finding summer work for teenagers:
Better Than a Lemonade Stand by Bernstein & Huberg
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, etc. 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. Here too, 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 and Investment Advisors are and what they do. Teach them about stocks, bonds, mutual funds, etc., etc.
There are two really good books I would recommend to you as parents or grandparents. The first book – Kids & Money by Jayne Pearl - is simply outstanding as a guide for parents in teaching their kids about saving and investing. Another good source is The Wealthy Barber by David Chilton, an excellent book you should have your teenage (or older) children read. Both are available on Amazon.com.
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 you can let them begin investing in their mid-teens, if you have taught them adequately. While kids should keep most of their money in a risk-free savings account of some kind, don’t be afraid to let them invest some of it in the stock market.
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.
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 and/or bond 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 (www.morningstar.com) 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.
“Gifting” Money or Assets to Your Kids
Being in the investment management business, we get questions every year from clients who are trying to help their kids or grandkids learn to save and invest wisely. One of the most common observations along this line is: “I would really like to help my kids with investing, but they just don’t have enough money to get started.”
This is often all too true. Most young families just make ends meet and don’t have the savings to start an investment program when they really need to. Along that line, another very common comment we hear is: “I would love to give them the money to get started, but I worry they would just blow the money on wasteful things.”
Yet there are ways to “gift” money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life. And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire.
I will talk more about that below, but first let’s explore the basics of the gift tax exclusion. Current tax law allows you to gift up to $13,000 per year to a child or grandchild (or anyone for that matter), with no tax consequences for either the donor or the recipient. A husband and wife can give $13,000 each, or a total of $26,000 a yearto a single recipient.
The annual gift tax exclusion is one of the most popular ways that wealthy individuals transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay. Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government. I’m surprised that more families don’t take advantage of the gift tax exclusion.
Gifting: Control Is The Issue
One of the requirements of the gift tax exclusion is that the beneficiary must have ownership and control of the assets that are gifted. This is a big deal when considering gifting $13,000-$26,000 (perhaps annually) to a child, grandchild or other person(s). Generally speaking, if you gift it, the money becomes theirs, and it is possible that they can just blow the money on wasteful spending if they want.
This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys. But there are ways – directly and indirectly – to effect control of the assets gifted to a child or grandchild. If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever.
As noted above, Debi and I have established trusts for each of our children, and these trusts are where we make our annual contributions. Trust laws vary among the states, so I won’t get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children and maintain control over those assets, at least until they reach legal age, or whatever age you specify in the trust(s).
In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their own names. In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities.
The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents, etc., and for the transfers to occur through inheritance. Whether you use an UGMA or UTMA is determined by the state you live in (most states now use UTMAs).
To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. Custodial accounts are most often established at banks and brokerages.
The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences.But there must be a high degree of trust involved. If you do elect to form trusts, be sure to consult with an attorney that is familiar with the laws of your state.
Gifting To Adult Children
As noted above, you can gift to minors by establishing trusts in which the donor(s) can maintain control of the assets. But there is also a way to gift to adult children which can also be effective, at least in my experience.
Consider gifting them an investment account. Here is one way it can work. Let’s say you are the parents or grandparents of an adult child. You and your spouse agree to gift $26,000 (or some lesser amount) to your adult child or grandchild. But you only agree to gift the money if it goes into a specified investment account. And you may agree to gift another $26,000 in the following year (or years) if things go as planned.
This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help). It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc.
For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children. You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years. This provides a huge incentive for the beneficiary to keep the money in the investment account. If they don’t, you simply stop the gifts beyond the first year. Sounds simple, but it can be very effective.
This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want. If they get into investing, that means they’ll likely get more serious about saving, cutting expenses, building wealth, etc.
As always, the best course of action depends upon your individual situation, so it’s important to seek out the advice of a qualified tax professional or estate planning attorney before pursuing any gifting strategy.
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. You may want to consider “gifting” money to your kids or grandkids (or others), as discussed above. The IRS gifting limit was increased to $13,000 in 2009 and remains at that level today. So a husband and wife could gift a total of $26,000 a year to a child, or anyone for that matter.
In the case of minor children or grandchildren, you may want to consider using an UGMA or UTMA depending on the state you live in. Like most investment firms, my company accepts UGMAs and UTMAs. This can be a great way to transfer assets.
Finally, I generally recommend only professionally managed investment programs, especially for minors. Minors (and for that matter, most adults) need help in selecting and monitoring their investments. If you would like more information on doing so, be sure to contact us. We have professionally managed programs that only require $15,000 to invest.
I hope this week’s information helps. Feel free to share this information with anyone you feel will benefit from it. In fact, you might want to encourage them to sign up for my free E-Letter at www.ForecastsandTrends.com. These weekly articles are a good educational tool for staying informed about the markets and current economic issues.
Glad to be Back From Europe
Debi and I just returned from a 10-day vacation in Italy to celebrate our 25th wedding anniversary. I had never been to Italy before. We spent time in Venice, Florence, Siena and Rome. The Vatican was incredible! We also spent a couple of days in Tuscany with John Mauldin and some of his family at a villa they rent every summer. It was the most relaxing part of our high-octane trip. John and I reflected on the fact that we have been good friends and former business partners for over 25 years. Debi and I greatly appreciated the hospitality!
Finally, I would like to congratulate two of our employees - Joanne Sullivan and Miki Elliott - who just passed a key milestone. Both have been continuously with us for 20 years as of this month. It may interest you to know that all but one of our staff members have been with us for at least 10 years, and our company often feels more like a big family than a business. Debi and I appreciate the dedication and service of all our employees!
Happy to be back in my own bed,
Gary D. Halbert
Kids and Money
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and 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 (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.