Our Kids and Money

A couple of years ago I wrote a post on Kids and Money.  As our daughter prepares for her final high school year, I thought it would be proper to review what our positions were in that post, and update accordingly.

In that last post I discussed where Mrs. Oldster and I come from financially.  How we got to our understanding of money.  I explained that the jury was still out on how our daughter would see this issue.  We’ve been proactive in discussing money and its role in our quest for happiness with her, but do any of us really know what our kids are thinking until they have enough experience for us to see by their actions? 

We have generally adhered to the points outlined in that earlier post, but have revised a couple of positions based on watching how she is doing, as follows:

Allowance

We still automatically deposit her allowance into her account, but we’ve changed the nature of the account from a savings account we kept at Capital One, to a “checking account” (I use quotes here because I don’t imagine she’ll actually write checks) we have as an ancillary account to our main household checking account.  Our bank actually has a program for just this purpose.  We moved her money from Capital One into this account and got her a debit card.  Her allowance is automatically put into this account each month.  Additionally, we put her in charge of her spending on clothing.  We sat down as a family and figured out what we spend annually on her for clothes and shoes and we give her 1/2 of that in January, and 1/2 in late July. 

            The result of this, thus far successful experiment, is that in 95% of instances she is completely in charge of the money she needs for day to day life.  We still keep the cars fueled and maintained (we may change that as she gets older and goes off to college).  Also, there are times when just giving her a few bucks is easier than making her drive to an ATM.  We try to transfer money from her account to ours when we do that, but we are not perfect on that.

Roth IRA

Our daughter got a summer job last summer and we funded a Roth IRA in the amount of her Summer earnings.  It wasn’t a lot (less than $1000 total) but when I showed her what historical returns could look like if she left it in there until she was my age, you could see the light dawning in her eyes.  The concept of the magic of compounding has taken root in my 16 year old girl.  That makes an Oldster happy.

            While she had a few thousand dollars of investments in individual stocks that she researched and selected (mostly based on products/services she likes), we put her Roth money in total market funds.  I explained to her that while it is important to understand how the market operates and how companies participate in it, in general she’ll be much better off putting her hard earned capital into broad market funds.  Rare is the person who is smart enough to consistently beat the market by making individual stock selections. 

Sidebar: see why I know this to be true

While her understanding of how individual companies work will be enhanced by the few individual issues she owns (Disney, Apple, Campbell’s Soup, Mondelez Intl., Procter & Gamble are her main individual investments), it is better in the long run to own the whole market and spend your time pursuing your passion and enjoying what life and family have to offer.

College

We have begun regularly reviewing the 529 plan investments with her.  She knows what she’ll have to spend on college and our plan is to allow her to spend that money on her education in the way she wants.  Beauty School? Aircraft Maintenance? Nuclear Engineering? We are ready and the decision is hers. We’ve had in-depth discussions on educational debt and why it should be avoided where possible, and she has put time and effort into looking at what her alternatives are.  

While I believe that our daughter has a good grasp on the economics of college selection, my wife and I still come at it from slightly different directions.  I am the child of public education.  I graduated from a State University for my B.A., M.A. and J.D.  While I wanted to study somewhere I did not hate, it was very much a utilitarian decision.  I went to school where I was (law school was a different calculation). My wife, however, was singularly focused while in high school on getting into a specific, very prestigious (read expensive) college.  She was the girl in her high school who won all the awards and got all the accolades.  While she had an offer of a full-ride (plus stipend) at the State University, she had been so focused on getting into this private college that when she was accepted she did not hesitate and went to school there (to be fair, she got about half of the cost paid for by scholarships and work-study programs, but the rest was covered by student loans).  

Mrs. Oldster’s college experience was everything she had hoped it would be and was, up until then, the defining experience of her life.  She worked for the U.N. while in school and for a time after, and ran a national collegiate conference in New York.  I worked at a hospital, and did private security. I often say that the difference in the educational experience between us can be summed up by what our classmates went on to do.  My classmates, by and large, went on to be local business owners, vice-presidents of local banks, teachers and local leaders in the community.  Mrs. Oldster’s classmates are c-suite officers of multinational companies, U.S. Ambassadors, foreign service officers, members of congress, and foreign royalty.  The different levels between her experience and mine can perhaps, be better illustrated by the fact that when I applied to law school, my graduate advisor and a woman I worked with gave me letters of recommendation.  My wife had a former National Security Advisor, and someone who later became Secretary of State as her recommenders.  We both got in, but you can see the difference.  This defines how we both see the educational experience.  Me: very utilitarian.  Her: much more than that.

I outline the differences in our perspectives to highlight both sides of the issue our daughter will have to decide.  I’m confident she will make her decision based on what she thinks is best for her understanding both sides.  I advocate that it should be a mostly economic decision, based on my personal experience.  My wife advocates that it cannot be solely an economic decision, based on her experience.  It will be interesting to see which direction she goes.

Keeping Her Eye on FI

As our daughter moves toward adulthood, I’ve been introducing her to the FIRE concept in phases.  I think it is hard for someone to correctly value the idea of Financial Independence (much less, Retire Early) without some time in the real world faced with real world pressures.  But the basic concept of retirement she understands because she hears my wife and I discuss it frequently.  One of the concepts I’ve been talking to her about is somethingI first read about in a post by Zach at Four Pillar Freedom. The concept of “Coast FIRE” is that you work your ass off and save enough money in your investment accounts so that in time, given the magic of compounding, you will have enough for retirement when you get to your target date.  For instance if you want a million in your retirement fund at 65, you work as hard as you can in your 20’s to save $175,00-$185,000.  This will be enough to get your account to $1,000,000 by the usual retirement date (the usual assumptions apply).  It is a fairly straight forward approach to making sure you have enough to retire at the end of your work life.  If you can accomplish that by, say, 30 years old, then you can do whatever the hell you want for a living for the next 35 years.  Want to serve coffee at Starbucks?  Go ahead.  Want to work in a book store?  That’s fine.  Want to teach english in South Korea?  The world is your oyster.  You only have to earn enough to meet your immediate expenses because retirement is already taken care of.

Granted, there are some obvious shortcomings to my simple explanation of Zach’s idea.  But without getting into them, the simplicity of the notion is quite beautiful.  Work hard for a few years, then spend the rest of your life following your passions.  As long as you avoid touching your nest egg, you’ll probably be fine.  And, it is possible, even likely, that you’ll find a way to add to that next egg and perhaps be able to call it quits (if you want) well before the initially established target date (my experience is that if you are doing what you truly love, then money generally finds you).

So putting my daughter in the frame of mind to first secure her future, and then look for life’s satisfactions, could set her up to have a very interesting, and secure life.  As you can see, we’ve expanded the depth of our discussions about money and its uses.  We’ve gone from simple to moderately complex.  Now we just have to see how it works out.  Perhaps I’ll update this in a few years and share a bit more of the journey.

Until Next Time, FIRE On! – Oldster