Kids and “Their” Money

When putting money aside for your child you have many options and considerations. It can be its own dizzying process. Yet, there are some simple considerations to help you decide what to do.

Paying for college is likely your primary concern, and FAFSA couples right with it. If you’re rich, then financial aid will not be much of a consideration. Although, we all face the question of what is the best thing to do to save for our children’s future?

Start a 529 account is the standard advice these days. Why? The money will grow tax-deferred and not be taxed or penalized at distribution if used for approved college expenses. Many states also give tax credits for money put into 529s. Additionally, the money is still under the parents’ name, so it will not be counted as an asset of the child in the FAFSA needs calculation. There are no limits on the amount deposited, and extended family can conveniently make direct deposits. If the child doesn’t go to college or the money isn’t fully used, it can be transferred to a sibling or other close family member. Hence, a pretty sweet deal, if used for school expenses.  

You could start a trust, such as a UGMA or UTMA. This makes the money owned by the child who will receive control of it at 18 to 25 years of age depending on the type of trust and state law. The trust gains will be taxed at the favorable kiddie tax rate and not part of the parents’ taxable income. The money will be available for any use. So, if you want to make sure your child has cash for buying a house, starting a business, traveling the world, or whatever, trusts are a better option than 529s. The big downside is the money will be theirs at the legally required age, and you will no longer have control of it. Also, if they apply for financial aid, the trust will count against their need more than if you kept the money under your name, such as in a 529 account.

What else can you do? If you want to maintain control of the money and still have flexibility for its use, then the plain answer is to start a brokerage account under your name that you designate for the child. It’s still your money, and you can tap into it whenever for whatever. There’s no special tax advantage other than the capital gains rate will likely be lower than your marginal tax rate. That’s the price we pay for total control and flexibility.

I know, you’re saying there must be some other way. Yes, there are lots of other options. Some are expensive, such as a trust that is custom designed by an attorney. Others are not as beneficial, such as a Coverdale account which limits total annual contributions to $2k or bonds that likely won’t keep pace with the inflation of education costs. BUT, here’s one you may not know about:

Roth IRAs can be used for college for two good reasons: (1) Because it’s a retirement account, it is not part of the FAFSA needs calculation, and (2) There is an exception to the early withdrawal penalty for college costs. While withdrawn gains, but not contributions, would be taxed if you’re under 59 ½ years old, with so many of us having children later in life there is a fair likeliness your child will be in college (don’t forget grad school) when you’re past 59 ½. Hence, no tax or penalty on withdrawals for college, or any expense, from this option. Roth IRAs nicely balances monetary control, spending flexibility, tax liability, and investment growth. Regardless of your age, you must plan for it with your Roth, or you could be burning your retirement fund for a child whose income and willingness to support you in old age is uncertain.    

Bottomline, as with any investment, you should start early and regularly contribute to maximize growth for your children’s future financial needs.

Numbers Matter… Duh

Over 10% of the US population live in poverty and likely have been for generations. Another 30% aren’t living much better. There is so much to be said about systemic racism, social welfare reform, and the many steps our civilization must take to fix the financial misery and trauma so many millions live with every day.

About 100 million people in the U.S. live in households with income over the poverty line and below the median income. 100,000,000+ people are reaching for that elusive status of “well-off” and fighting to avoid the undesirable label of “poor.” Among them are millions who have thrown their hands in the air and reluctantly accept being “okay.” Most of these people do not meet the experienced investor base level to start investing.

I do not have a broad solution, and I will not be unrealistic. People who live in poverty or use social welfare programs are not in a position to invest money. I do not subscribe to the bootstraps method to social and economic advancement, and I definitely will not say a few well-timed investments will launch you into a higher economic class. Experienced investors would advise you not to invest money you would use for housing, food, and other basic needs, have all your credit cards paid off, and have an emergency fund to cover several months of costs.

I have a different idea. Start investing! Opening a brokerage account is easy, and many don’t have fees. With $1.00, anyone can start investing. See and learn the value of compounding interest that works for you. Of course, debt management is essential and should not be ignored. The shift from a debtor mindset to investor mindset does not happen the instant you pay off your last credit card or loan. Commit a small part of your monthly income to future you. Start making money conversations a positive, hopeful experience.

What Is Money?

Money is the replacement of raw resources. Money is the representation of value. Now, money is an encrypted code that is fully detached from what it is: the valuation of raw materials, the means to process them, and the effort/pain of human labor.

If I work hard, have tools, the knowledge to use the tools, and/or have raw materials, then I can have income and grow my wealth. If I was a farmer 10,000 years ago, others would know I was wealthy by the large bundles of grain I brought to the market. If I was a landlord 1,000 years ago, others would know I was wealthy by the jingle of gold coins in my purse as I rode by on my ornamented horse. If I was a business owner 100 years ago, others would know I was wealthy by my tailored suit and the fact that I drove a car.

Today, there is no clear physical manifestation of wealth. Sure, if I drive a luxury car or live in a mansion that will make me appear to be wealthy, but I may merely have enough income and/or credit to afford the expense of having these items. Half the cars on the road in West Linn are Teslas. Who’s wealthy? Would my grandchildren care that I owned a Ferrari? If I spent my whole life working to pay for it, they would care because I created no wealth to benefit their lives.

Money is the representation of value. If you have money, you have value to benefit your life, the lives of your loved ones, and the lives of others you care about. You can be wealthy and grow the wealth of others you care about for generations to come.

The first step to becoming wealthy is valuing the money you have earned from your hard work. How much of your hard-earned money do you want to pay as interest on your credit to a bank because you want to appear wealthy? How much do you value the appearance of wealth versus actual wealth?

Do not let your money become someone else’s wealth.

I Got This Mattress In Italy

Through high school and college, I have worked as a busboy, a dishwasher, a telemarketer, a pizza delivery driver, a radio DJ, a server, and a taxi driver. I’m glad to have experienced such a variety of jobs, but I needed to work more than I preferred. Not to judge my parents, but they, like too many of us, did not understand money, its value, how to build wealth, and how to develop a financial plan.

If my parents invested $50 a month for me, then by the time I turned 18 years old there would have been money for college, a down payment on a house, or business starter fund. Would it have secured a comfortable life for me? No. Would I have been given a leg up, reduced debt in early adulthood, and knowledge of what wealth can do to benefit the next generation? Yes, yes, and yes!

In case you checked, $50.00 a month over 18 years would become about $30,000. Not a lot by today’s standards, but when I was a child (some 30+ years ago) the value of a US dollar was more than double what it is today, nearly triple in my early childhood.

Inflation is the first real lesson to understand. Inflation is simply understood as prices go up because the purchasing power of the dollar goes down. The value of a dollar is less each year. My mother often talks about how cheap food used to be, “When you were kids, I fed the family for a week with only $100!” I’m sure we’ve all heard this.

Reality check: Money isn’t worth what it used to be.

The value of money is always changing, mostly in the downward direction. This is a good thing. Why? Wouldn’t it be better if the value of the dollar went up? Oddly, no. If that happened, what it really means is that prices are going down because of decreased demand for food, services, and goods. Decreased demand means a shrinking economy. That’s not good.

Think of inflation and the value of money as something in your home. If the demand for food suddenly went down, that means someone moved out or died. Your money would be worth more, but as the result of a loss. Let’s consider a more positive thought: as children grow, they demand more food. There may be periods of unstable increases or decreases in their appetite, but their overall demand for food should increase through the years.

Zooming back out: We want an economy that has stable growth and low inflation. When inflation and demand are low, the Federal Reserve literally makes more money/credit available at lower interest rates. Then, millions of people start spending money on houses, cars, 80-inch TVs, and vacations. Eventually, inflation comes back up again, the Federal Reserve starts taking money out of the economy, buying slows down. This is the dance. Sometimes good, sometimes bad, but inflation is always happening.

The value of the dollar is going down every year. You cannot beat inflation by putting money in a checking or savings account. Yes, there is no risk of losing any of the dollars in the account, but you are losing purchasing power because it is not growing to outrun inflation. You might as well put your money in a mattress!

Today, commit to investing a regular amount of money for the future to beat inflation and have earnings that make funding college, buying a home, or starting a business a financial reality.

Who Wants To Be A Thousandaire?

There is wealth and there is income. Most of us only think about income as the word wealth is for the wealthy, and the only way to be wealthy is to have a lot of income. So, we get out there and make as much money as possible. This is wrong! We must stop acting like squirrels so concerned with the acquisition of nuts that we lose track of where we put most of them.

Of course, we all want to be wealthy. Lottery jackpots confirm that. Let’s stop for a second. What is the meaning of wealth? Abundance of money is an easy answer. Abundance should not be confused with the word profuse – which means having a great or lavish quantity. Consider this definition of abundance: more than what is needed.

If a squirrel only needs 1,000 nuts for the winter, but it had gathered 1,107 nuts. Is that abundant? What if we say over a squirrel’s lifetime (10 years for the Western Gray) it needs 10,000 nuts for all the winters of its life, and it had gathered 11,070 nuts in total. That’s enough to survive an extra winter had a truck not run it over.

Unfortunate events aside, we could say our squirrel had gathered an abundance of nuts throughout its life. You, hopefully, will not be hit by a truck and live to enjoy the wealth you have built. You may not have a profuse amount of money, but you will have built wealth to carry you through the winter years of your life.