When is the right time to have the money conversation with your kids?
Scott starts the podcast by telling a story of how he started an investment account for his first daughter when she was 10 years old. Not only did he open an account for his daughter, but he also tried to teach her about stocks, risk and the value of compound interest. Scott admits that this approach was a big mistake, too much info way too early. But now Scott’s other two daughters are 9 and 11 and he is faced with the question again; when is the right time to have the money conversation with your kids? Scott’s advice is that the best thing you can do for your kids when they are young is to instill in them the heart of a giver. Spending is fine, saving is fine, but giving is the best of all three to instill first.
Podcast Topic of the Day:
The one thing you need to teach your adult children.
The topic of the day is “The one thing you need to teach your adult children,” specifically, Scott references adult children who are just graduating college and are starting their first job. Many people would say that “staying out of debt” is the one thing to teach adult children. Scott agrees with this advice and references his podcast episode 118 where he discusses Dave Ramsey’s Baby Steps to getting out of debt and living a debt free life. Although Scott agrees with the need to stay out of debt, the “one thing” he recommends is to “start saving now”. Although this may seem like logical advice, Scott believes that young kids are not saving enough, and some are not saving at all. And when you tell your kids they need to start saving, they will likely ask you “why”. Scott goes on to explain three simple answers to help answer the question “why”.
Three reasons why kids need to start saving now.
1. Kids need to start saving now “because it is easier.” The old belief is that you need to save 1 million dollars for retirement. Scott references a new article he read that says $1.7 million may be the magic number needed to save for retirement as a result of inflation. In order to provide a simple example of how it is “easier” to save now, Scott outlines the savings amount needed to save $1.7 million for retirement (assuming an 8% return).
- Starting at age 25, you need to save approximately $500 per month in order to save $1.7 million by retirement. If you are making $40,000 a year, this would be 15% of your income. Note, this aligns with Dave Ramsey's recommendation that you save 15% of your household income when you reach Baby Step 4.
- Starting at age 30, you would need to save $750/month in order to reach $1.7 million by retirement.
- Starting at age 40, you would need to save more than $1,800/month in order to reach $1.7 million by retirement.
Although it will be difficult and may not be easy for kids to be out of debt and start investing 15% of their income at age 25, Scott recommends starting with a financial plan to help you build a path to get there.
2. Kids need to start saving now “because it is too difficult to start later on.” As discussed in reason number one, the amount needed to save each month goes up as you get older. Not only does the amount go up, but life changes such as marriage, kids and a home purchase make it too hard to save 15% of their income.
3. Kids need to start saving now “in order to develop a habit and have discipline.” Scott discusses how starting to save 15% of your income from the start will become habit and it will become part of your monthly budget. "It will be like brushing your teeth every day, like paying your bills every month."
Forbes Article: How to become a millionaire in your 30’s
Scott was recently quoted in a Forbes.com article titled “How To Become A Millionaire In Your 30s”. The article talks about many different areas for young adults to focus on in order to reach millionaire status by their 30’s. Scott’s quote in the article speaks to the need for young adults to be focused and commit to becoming a millionaire.
Two common questions of young adult investors:
1. Should I invest in a Roth-401(k) or a Traditional 401(k)?
Now that your young adult is ready to start saving and investing, they will likely have some common questions about investing. Scott reviews to common questions and discusses how to answer them. The first question they may ask is "should I make employee contributions pre-tax into a 401(k) or after tax into a Roth 401(k)?" As a general rule of thumb, Scott recommends that most young investors, who are likely not making large sums of money, invest in their Roth 401(k) option. The reason being, while they are just getting started in their careers, they are likely making a lower income and therefore are likely in a low tax bracket, thus, they are not saving a lot of money on taxes if they were to invest in the pre-tax 401(k) option. If they invest in the Roth option, then they have many, many years for the Roth investments to grow tax free.
2. How do I invest my money?
The second question that a young adult investor is likely to ask is, “how do I invest my money in my 401(k)?” To answer this question, Scott recommends that the target date funds are likely a fine option for young investors who are just getting started. Target Date funds are a great option to make the investment selection process easy for beginning investors. They may not always be the best option in a 401(k), but sometimes they are and typically they are a good selection to make it easy for young investors to get started.
Podcast Closing Words:
As parents we have a lot of responsibilities. Scott admits that he has a lot of work to do, to be a better parent, to teach his kids more things. Scott lists the 3 things he is going to teach his kids:
- Starting when they are young, to have the heart of a giver.
- When they are in their teens, to stay out of debt.
- Once they graduate from college, to “start saving now”.
Part of being a family steward is being a teacher, teaching our kids great money habits so that they can teach their kids. It becomes a generational thing and we can change the family tree, starting with us right now.
The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principle at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.