Teaching Kids About Money

My parents were basically fantastic. I'm going to indulge in a little bragging right now, so forgive me. They have a good strong marriage, they taught all of us about the Gospel, school, work, happiness, marriage, and getting along with others. Basically they covered most of the major topics that a person needs to know to have a happy and fulfilled life. I've heard them say that one of their major goals was to create self-sufficient and well-rounded children who could do well in the world. While that's probably a goal for most parents, mine worked and planned to teach us the things that we'd need. More than just a nice platitude, that goal informed the way they approached parenting. Basically, when my wife and I are unsure about what to do with our kids, we'll try to figure out what my parents would do.

As great as they were, finances are one area that my parents could have covered better in their various life lessons. I don't think they fully understand money themselves though. They hit many of the most important things like "spend less than you earn," and "save up for things you want instead of buying them on credit," but they didn't really do much to explain other concepts like investing, savings rates, asset allocation, etc. I didn't really start to understand how investments worked until I researched it on my own.

My wife and I have been pondering how to teach my kids more about money than I learned. They're pretty young, so we have some time to figure things out. but we have done one thing: we established a custodial account for each of them.

A custodial account is a special kind of brokerage account. Basically you can buy stocks just like you would with a regular account, but the stocks are owned by the child whose name is one the account. You (the parent) act as the custodian and have full control until the child reaches a certain age. In most states the age is twenty-one, while a few are as low as eighteen.

I am a firm believer that kids learn best by doing. In this case, I want to have a real account statement that I can show them. I'm hopeful that it will be a useful tool for the kids to learn about money and math. For instance, when you're learning addition and subtraction, how much more interesting would it be to be able to use real numbers and see how much money you made or lost in a year? What about when they're learning about compounding interest? Suddenly they can see a real example of compounding interest before their eyes. I can imagine them using data points to create plots when they learn about graphs. Basically I want this to be something that they can be involved in and see grow.

A custodial account lets them own real securities in companies that they like. While I typically consider index funds to be the best investments for most people, for a kid to own a few shares of Disney, General Mills, Mattel, Nintendo, or Coca-cola could be something really exciting and could tie all this financial stuff to the real world.

I have high hopes for these accounts as learning tools, but there are a few drawbacks to be aware of if you're suddenly considering starting these up for your kids. First, it's possible that your kid might be an idiot when they're eighteen or twenty-one. I know I was. For me, it would frustrate me if they wasted this money, but at some point you have to let them make their own mistakes. I would consider that I had done my best to teach them, so if they mess it up there's nothing I can do about that.

Second, they aren't great vehicles for transferring a lot of wealth. I'm looking at probably less than $15,000 when all is said and done. If you've got a much larger amount of money to transfer to a child, you'll be better off with a trust fund.

Third, if one child's investments do better than the other's there could be some jealousy. This could be a problem or an opportunity. I'm hopeful that my kids will learn to be happy for each other, not to compare themselves negatively with each other, though that might be a bit of wishful thinking. We'll cross that bridge when we get there.

Finally, the money is actually the child's as soon as it goes in the account. There are serious issues with parents having some buyer's remorse and wanting their money back. You can't do that. In the eyes of the law, it's robbing from the child. Technically you could probably get around most legal issues if you raided the account, but it's wrong to do so. We believe in "obeying, honoring, and sustaining the law," right? Don't put money in there that you're going to need back in the future.

As for me, I'm excited with the possibilities that come with the custodial accounts. I think there are tremendous opportunities for teaching my kids and I'm excited to see what happens with these accounts.

If you're interested in opening a custodial account, there are lots of options. I chose sharebuilder.com since we already do our banking with capitalone.com, but do what works for you.

The tale of three siblings: Stocks, Bonds, and Cash

I was thinking about asset allocation this morning, and I hit on a good metaphor. Let me know what you think.

The proper asset allocation is one of the most important decisions that you can make when dealing with your stash. Unfortunately, the ideas about the proper asset mix range from people like Peter Lynch who would say that you just stay 100% in stocks all the time, to people who avidly listen to Rush Limbaugh, many of whom I assume have taken their savings out of the market and invested heavily in gold. That assumption is based entirely on the commercials I heard when I stopped on his show for ten minutes once when driving. Therefore, I'm sure that it's 100% accurate.

I believe the more conventional idea that most people should have some mix of stocks, bonds, and cash. To illustrate my point, I'm going to use my wife's family as an example. Not so much their financial situation, but the life situation of some of her siblings.

First, my sister-in-law just got her mission call (huzzah!) to Taiwan. It will probably be a crazy ride. Weird, unexpected things will happen. It will probably the very stressful until she adjusts. The reward for all of this will be exponential growth. I'm not one of those who believes the stupid idea that a mission is the best two years of your life, or even the hardest two years of your life, but missions do a fantastic job of preparing you to meet later challenges.This to me is analogous to investing in the stock market. You get the expectation (over a long timeframe it's a near certainty) of fantastic growth, but there are a lot of ups and downs along the way. Stocks are the thing that does the heavy lifting in your portfolio.

My first brother-in-law is doing a degree at BYU. He's changed his major once or twice, but no matter what he does, as long as he finishes he'll get a degree in a relatively useful field (this doesn't apply to everyone...myself for instance). He'll have some growth, but not as much as a missionary. The main thing here is that he invests a certain amount of money and work for a virtually guaranteed reward (a degree). This is like bond investing. You're not going to hit it out of the park with bonds. The goal with bond investing is a predictable return and safety of principle They reduce your portfolio's volatility and act as a hedge against deflation.

Finally my second brother-in-law basically finished his degree at BYU, but didn't apply for graduation yet, so that he can take a few extra classes and (I assume) figure out what he wants to do with his life. I don't think he has been working much, and he definitely hasn't settled in to a career path. He's not married, not dating anyone seriously (that I know of), and basically still in the process of figuring out what he wants out of life. But when my wife got sick and we needed a lot of help around the house, which of the three siblings do you think was the first one to come and stay with us? Which one was the first person to make sure our house kept on running smoothly when everything was falling apart? This brother-in-law is like having cash on hand. You won't see the same growth the you will from the other two investments, but cash is there when you need it. When everything falls apart in your life (and believe me it will at some point), you want to have some cash on hand to make sure that you're not completely derailed.

So there you have it. Three siblings, three investments. If you haven't looked in a while, maybe it's time to check on your asset allocation.