I’ve been trying to figure out different ways to teach my children about money as they get older.
My kids are 6, 3 and 3 so I’ve got some time but I want to make sure they understand the important building blocks by the time it matters.
It would be nice if you could simply open a Roth IRA in your child’s name to put some money in on a regular basis. They have so much time in front of them that compounding can have an enormous impact.
People have told me there are some workarounds to put something like this in place but I highly value convenience in my financial life and none of these options are convenient.
Last week I was having a conversation with one of my firm’s financial advisors, Matt Lohrius, who helps run our automated investing platform Liftoff, which was set-up in partnership with Betterment. Matt reminded me of how easy it is to set up an account and then fund various goals on the platform with just a few clicks.
It took me less than 10 minutes to set up an account that includes a goal for each of my 3 kids:
They now each have their own portfolio invested in a diversified basket of funds that will invest automatically on their behalf and utilize tax loss harvesting with no work on my part. It’s cheap, simple, automated, easy and convenient which are the hallmarks of my personal investing philosophy.
I’m starting them each out at just $50 a month. This may not sound like a lot but by the time they reach age 21 that could be anywhere from $12,000 to $18,000 using a fairly conservative return estimate in the 4-5% range.
This money can serve a few purposes:
It can be used to teach them about saving and investing. When they’re old enough I’ll start showing the kids these accounts on a periodic basis to get them involved. The hope is seeing these numbers grow over time will get them interested in saving and investing.
I plan on instituting a mom and dad match once they start getting birthday money or a job someday to encourage them to add to the account themselves and see a bigger bang for their buck with our matching funds.
It can help them when they’re just starting out after school. Once you finish school and enter the working world it can be overwhelming to face all of your new responsibilities.
Many young people are saddled with student loans. You might have to come up with a deposit if you move into a new apartment. Maybe you’re taking on a car payment for the first time. Or maybe you want to begin saving for a down payment on your first home or your dream wedding.
Whatever the situation, it can be difficult for young people to get ahead financially these days.
When the baby boomer generation turned 35, they owned more than 20% of the nation’s wealth. Millennials will reach an average age of 35 in 3 years. As of last year, they hold just over 3% of the nation’s wealth.
Part of the reason for this is so many young people start out in the hole these days. Hopefully these savings will help my kids avoid some of the typical early financial setbacks young people face.
This could help my own finances in the future. Maybe there’s a selfish element to these accounts as well. I’m sure there are plenty of parents who still have their kids on the payroll these days even though they should be on their own.
There are certain expenses you know you will be forced to make someday but you don’t know exactly when. This is especially true when it comes to your children.
The more I begin saving now on their behalf, the less my wife and I are potentially on the hook in the future.
Hopefully, these accounts will also help provide some boundaries. This will act as something of an early inheritance but they will have a good idea how much it will be and they can choose to either take the cash at age 21 or continue saving and investing to grow the balance depending on their needs at that time.
And while the financial aspect of these accounts will hopefully make life a little easier for them when they’re starting out, I hope they act as more of a learning tool about the importance of saving and investing than anything.
A Roth IRA For Every Baby in America
Learn more about Liftoff here. Matt would be happy to answer any questions you may have.