When I work with people on their finances, many times, someone will say, "I wish I would have started this a long time ago." This month's newsletter is about starting as early as possible with our financial education, financial habits and even our investments leading to a better future for you AND your family. Let's take a look at how a life can take a very different turn with an early start.
Let's start with the couple that brings their newborn baby home from the hospital. What should they do? Go to socialsecurity.gov, register and identify your survivor benefits. Those benefits kick in for your child and your spouse if you were to die and they are free based on you paying into the social security program. Based on how many children you have, that free life insurance could be more than $500,000!
Next, put that newborn baby on your credit card as an authorized user. Why? They will end up with a very high credit score by the time they hit 18 and are ready to enter the world. There are a couple of caveats though. This is smart if you have good credit. If you don't, avoid this. They will send a credit card to your newborn and even as they reach the teenage years. Just cut it up. You help them, they cannot hurt you.
Next, add to YOUR financial education so you can teach your children or grandchildren as they age. Make sure you are learning from the right people, which means avoiding anyone who sells products like an insurance agent or fee based financial advisor. Find the right teachers and never stop learning! It will be up to you to teach those kids before they hit the cold, hard, tough streets. Start here.
Will you need life insurance? Maybe, based on how much free insurance you already have. Do you have a free benefit at work? If so, how much is it. How much do you have in those Social Security survivor benefits? Add up those monthly amounts, take it by 12, and then by the amount of years they have before they graduate. If you still feel that you need more life insurance, proceed to the next steps.
Let's say you both have $500,000 at Social Security and the primary earner decides she needs $1,000,000 total. Go to term4sale.com and see how much an extra $500,000 would cost taking the children through high school and college if you like. A quick check showed a cost of $15 a month on a 20-year level term (premium does not change) on $500,000 for a 25 year old female. That death benefit is tax free by the way.
That might make sense to some folks, but here is what you do not do. Do not buy crappy whole life insurance, which will cost you about 10 times the amount in premiums. That money should be going into stock index funds in a retirement plan at work, a Roth IRA outside of work and even a brokerage for you and/or your child. That's right you can start investing in low cost stock index funds for a 1 month old!
Let's take a step back to cover something that should be avoided at all times. DO NOT buy life insurance on children. Instead, invest that money in a 529 College Savings Plan and/or a brokerage that would be in your name, but earmarked for their future. There is an opportunity cost when buying crappy whole life insurance policies. That money can work much better somewhere else for that child's future.
Let's say you have gotten smart on investing and that means you are putting a large chunk of money into your 401(k), buying low fee stock index funds. You do the same with a Roth IRA at a place like Vanguard. You also put your savings and other stock index funds in a brokerage at Vanguard. Well done, but now you can open up a separate brokerage in your name, to invest for your child at one month old!
You could get started with say $100 if you like as you buy an Exchange Traded Fund (ETF) like VTI and/or VBR. You could then feed those ETFs every month while they are growing up with that same $100. What would they have in 19 years at a 10%rate of return (VTI has averaged 10.69% and VBR has averaged 13.61%)? $68,141 is the number. What about $200 a month? $136,283 is the number now.
That is a very small number compared to what it could be. Let's say you do the $200 a month thing, but also add in other money into the account over the years as you spend less on stuff and invest more in them. That means cash at birthdays and Christmas. That means telling grandma and grandpa stuff is not needed, investments are. This includes taking gifts and at least half of their income and investing it.
What does it look like if you are able to average $4,800 a year instead of $2,400? $271,343 is the number. What if you were able to average $10,000 a year? $563,973 is the new number! Big numbers come from adding up small numbers over time. It comes down to putting their future ahead of buying more stuff that they do not need. Now, are we done? Nope. The child needs to be involved.
We want the child to be active in designing their future. That means they become educated by the right people leading up to entering a very unforgiving world. They send at least 50% of their gift money to their investment portfolio in the brokerage. They send at least 50% of their earned income to that same portfolio. They see the value of saving and investing now. You might open up a custodian Roth IRA.
Whether that child enters the world with $50,000 or $500,000, they are going to have a big leg up on their peers. Maybe they use some of that money for college, avoiding debt. Maybe they keep it invested and start working immediately doing something they enjoy, again avoiding debt. This opens up so many possibilities that all started with that initial investment and the habit to continue saving over time. Now go!
Your Child/Grandchild can be the Designer of THEIR life!
