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Advice for helping to set kids on path to ER
Old 05-22-2012, 08:24 AM   #1
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Advice for helping to set kids on path to ER

I've been questioning lately whether I should open a Roth for my daughters as soon as they start to work and set aside an equivalent amount to whatever they make (babysitting, HS jobs, etc...)... or convince them to set aside some percentage that I'll match like employers to 401k's these days.

The huge benefit of having that savings growing tax free at a very young age is incredible (I wish I had $5,000 put into a ROTH for me in the early 90s)... but I also really want to avoid giving them the impression that savings is easy because mommy and daddy set it aside for me. Also, the last thing I need is one of my daughters deciding when she goes to college that she can pull the money out to buy a car, or pay off a credit card bill... since I would assume she'd have complete control over the account in her name.

Anyone else been down this road and have some wisdom to pass on? Is it better to just teach them all the lessons and let them go at it on their own... encourage, but don't force? I understand that when money is invested by someone else for you, you think of it entirely different than if you saved it yourself.

Would I be better served applying those funds to my own Roth and plan to pass that down to them? I guess that would achieve the same goal without the risks.

Thoughts/Ideas/Suggestions appreciated.
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Old 05-22-2012, 09:30 AM   #2
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I gave DS $10k for two years of Roth when he graduated a year earlier than budgeted. It's still in danger of withdrawal if he decides to buy a house, but otherwise we might be in good shape. Better than that though, we started him on a budget, including retirement savings. He seems to be following those outlines as far as we can tell.

It was kind of funny that he started the Roth account, put the contributions in, and then a few months later realized that it wasn't like his 401k. He had to actually buy a mutual fund. So it was good to have that experience.
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Old 05-22-2012, 09:51 AM   #3
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Most people either get it (an understanding of LBYM and saving and investing for the future) or they don't. Efforts to change their thinking are often met with other than the desired result. IMO the best thing you can do for young family members is to show them how YOU used LBYM and saving and investing to reach FI. Teach them about the various types of investments and investment plans and how you used them to build towards FI. I think that in many cases opening an account for and contributing to it for our offspring will make it too easy for them and they will not appreciate it enough to keep adding to it or even worse they will withdraw it to buy a depreciating asset, like a car.
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Old 05-22-2012, 09:51 AM   #4
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Luckily our parents, DW & I both, instilled LBYM in us. We also had larger incomes than our parents so saving came pretty naturally. Not sure how you'd instill it in a young adult who hadn't had that influence all along, though I'm not assuming what the OP's personal case might be. They gave us allowances (and offered chores that paid periodically) and made us save & buy non-essentials for ourselves (do parents still do that?). They also didn't give us anywhere near anything we thought we wanted - though they could have easily afforded it, I think they consciously made sure we just didn't get "things" too easily.

This article, especially the interactive chart, might have helped persuade me - though numbers & charts have always 'spoken to me.'

Best of luck...

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Old 05-22-2012, 10:05 AM   #5
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Although the power of compounding thing is seductive, I decided that saving for DDs retirement was over the line. In a sense you are offering financial assistance to a 50 year old.

For me, this was the right decision since she makes good money, is more LBYM than I, and is saving tons.
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Old 05-22-2012, 10:05 AM   #6
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Having an account, watching it grow, learning to invest can help set them on the path to financial security when it is alongside teaching your children the importance of saving and living within their means.
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Old 05-22-2012, 10:55 AM   #7
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Interest is a benefit when you've got positive net savings, and a burden when you've got negative net savings. The key word is "net".

I don't see how opening a retirement savings account for my kids would change their net position any more than picking up part of a down payment (for example). One increases the interest they earn, the other decreases the interest they pay.

Regarding attitudes, if I set up the retirement savings account, they might rationalize not using their employers' 401k plan because Dad's contribution will already make them millionaires by the time they're 70.

My three kids have three sets of preferences on the question of enjoying life today vs. enjoying life 40 years from now. I don't think I could change anybody's mind at this point.
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Old 05-22-2012, 11:20 AM   #8
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Most people either get it (an understanding of LBYM and saving and investing for the future) or they don't. Efforts to change their thinking are often met with other than the desired result. IMO the best thing you can do for young family members is to show them how YOU used LBYM and saving and investing to reach FI. Teach them about the various types of investments and investment plans and how you used them to build towards FI. I think that in many cases opening an account for and contributing to it for our offspring will make it too easy for them and they will not appreciate it enough to keep adding to it or even worse they will withdraw it to buy a depreciating asset, like a car.
I wish my beloved father had talked about it to me. We lived so far below his means, that I didn't know he had any money until after he died. Didn't occur to me to ask, because all he told me he had were cds (didn't SAY he only had cds, but that was what I gathered because he never mentioned anything else). But he lived in SUCH LBYM, that all I thought was, "that's NOT worth it!"
OTOH, without his estate, I could never retire, although we did save 15% since my academic career began (admittedly, a late start). The odds of me reaching my late 50s were very poor. I also made a bad mistake in putting too much money on professional development activities. I thought it mattered--silly me!
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Old 05-22-2012, 12:30 PM   #9
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Originally Posted by EvrClrx311 View Post
I've been questioning lately whether I should open a Roth for my daughters as soon as they start to work and set aside an equivalent amount to whatever they make (babysitting, HS jobs, etc...)... or convince them to set aside some percentage that I'll match like employers to 401k's these days.

The huge benefit of having that savings growing tax free at a very young age is incredible (I wish I had $5,000 put into a ROTH for me in the early 90s)... but I also really want to avoid giving them the impression that savings is easy because mommy and daddy set it aside for me. Also, the last thing I need is one of my daughters deciding when she goes to college that she can pull the money out to buy a car, or pay off a credit card bill... since I would assume she'd have complete control over the account in her name.

Anyone else been down this road and have some wisdom to pass on? Is it better to just teach them all the lessons and let them go at it on their own... encourage, but don't force? I understand that when money is invested by someone else for you, you think of it entirely different than if you saved it yourself.

Would I be better served applying those funds to my own Roth and plan to pass that down to them? I guess that would achieve the same goal without the risks.

Thoughts/Ideas/Suggestions appreciated.
Only you know your daughters well enough to "guess" whether they will be responsible if you take this step toward their financial independence. DW and I have funded Roths for our kids ($1000 minimum, sometimes more per year) since they were eligible. One child has actually added money on her own. Two have left their funds alone. One has withdrawn money (and become "ineligible" based on mom and dad's rules - not IRS, heh, heh).

We are much older parents than most and we thought funding Roths might be a legacy we could leave which is potentially better than what ever is left over when we are gone. We tried to instill in the kids the "magic" of compounding and thought funding Roths was a way to put our money where our mouth is.

I still think it's a good idea for those who have the means to fund their kids' Roths. Still, it is not without dangers so I would make "rules" for continued participation by mom and/or dad. So, as always, YMMV.
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Old 05-22-2012, 12:46 PM   #10
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Luckily our parents, DW & I both, instilled LBYM in us. We also had larger incomes than our parents so saving came pretty naturally. Not sure how you'd instill it in a young adult who hadn't had that influence all along, though I'm not assuming what the OP's personal case might be. They gave us allowances (and offered chores that paid periodically) and made us save & buy non-essentials for ourselves (do parents still do that?). They also didn't give us anywhere near anything we thought we wanted - though they could have easily afforded it, I think they consciously made sure we just didn't get "things" too easily.
You have outlined our approach to giving our kids a kick start to financial freedom. Make them appreciate the value of a dollar, but allow them to make their own decisions as to how they save and spend their money and what they want to use their money for.

I let the kids buy stupid stuff from the dollar store so they can see what brings them value and what is just junk. Better to let them waste a buck or two of their hard earned allowance now rather than learn that lesson when the amounts in controversy are tens of thousands of dollars (ie a typical wedding or flashy car).

They know how to earn their allowance and they get rewarded for additional chores and academic performance above expectations.

We hope that us living our LBYM lives shows them that it is beneficial to not spend all your money. The kids are 0, 5, and 7 right now, and will be around 4, 9, and 11 when we hope to be FI (if not quite ER). The youngest one will never remember us working most likely. However the older two already see that working is a sacrifice and takes away from other pursuits that are more interesting and more fun. They intuitively get it. Sure, maybe they will find avocations they love and have a fulfilling career properly balanced with other things life has to offer. But more likely they will have some reasonably adequate job that pays ok but isn't intrinsically rewarding (like most people I know). And they will see from an early age that the way to get to choose what you do all day isn't blowing your money on worthless or low value things.

I don't plan on giving them a lot of kick off money when they reach adulthood, but maybe something along the line of $5k-10k total around graduation time or wedding time to help them get started. But they will know it is a fixed amount. I hadn't really thought of funding a roth, but that is something that they could do with the 5-10k. Or if we are flush with cash (10-15 years after ER'ing) that we will likely never need (ie early inheritance from my parents), then we might consider dumping some into the kids' roths as an estate planning tool.
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Old 05-22-2012, 02:20 PM   #11
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We decided not to fund IRAs (Roth or otherwise) for our kids. However, we did give a significant college graduation gift to DD with the understanding that it was to provide her with an immediate "emergency fund" so that she could start her Roth as soon as she was employed. That's exactly what happened - I helped her select the funds and set up the account with VG but she is on her own to do it. Note that she works for a nonprofit at a poverty wage (IMHO) but is putting 10% of her take-home into the Roth and says she doesn't miss it at all. So I guess we did something right!
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Old 05-22-2012, 05:34 PM   #12
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Luckily our parents, DW & I both, instilled LBYM in us. We also had larger incomes than our parents so saving came pretty naturally. Not sure how you'd instill it in a young adult who hadn't had that influence all along, though I'm not assuming what the OP's personal case might be. They gave us allowances (and offered chores that paid periodically) and made us save & buy non-essentials for ourselves (do parents still do that?). They also didn't give us anywhere near anything we thought we wanted - though they could have easily afforded it, I think they consciously made sure we just didn't get "things" too easily.

This article, especially the interactive chart, might have helped persuade me - though numbers & charts have always 'spoken to me.'

Best of luck...

Young Adults Can Keep It Simple: Start Saving : NPR

Calculate How Your Savings Can Grow : NPR
Can't speak for other parents - but we do this. Kids have assigned chores and get an allowance. Extra money can be earned for extra work. And we've recently pushed them to hit up neighbors to mow their lawns. They've got two clients so far. The neighbors are thrilled to get the lawn mowed for $10 - way cheaper than the lawn service... and the kids are thrilled to get $10. Win win.

They're both boys - but I'm going to have them take babysitting classes at the Y so they can start earning money that way, too.

I have a policy of not buying any video games - they have to earn their own money for that... which motivates them to earn and save till they can pay cash.
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Old 05-22-2012, 05:46 PM   #13
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When our son and daughter reached 21 we opened a ROTH IRA account with $1,000 in, plus gave them a spreadsheet that showed them the benefits of starting early. Being scientific nerdy types I also likened saving for retirement like shooting for the moon. They know that if you make course adjustments a long way out you don't use much fuel, and the longer you wait the harder it gets, until you get to the point where you don't have enough fuel, and miss the target.

We never put any more money in their accounts, and they both seemed to have learned to save for ER.
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Old 05-22-2012, 05:49 PM   #14
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I learned the value of compounding interest at an early age, when my parents started an account for me with some friend that was doing investements. Watching $600 grow at 10% a year was amazing to me when I was around 10 years old.

Of course I also learned a lesson about trusting your money to someone who promises you too much. That money and a large chunk of my parents money was gone 6-8 years later. I didn't get a lot of details, but I'm really cautious about "great investment opportunities"

Anyway, I totally vote for helping them out with a ROTH. I would also consider it fair to tell them they cannot take the money out for bills, car, etc. Although they could technically do it still, hopefully they would have enough respect for you that they wouldn't.
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Old 05-22-2012, 05:58 PM   #15
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Somehow, this reminds me of the marshmallow test
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Old 05-22-2012, 07:10 PM   #16
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Hi EvrCLrx,

My son is now completing his degree (next year), and is thrifty. I can tell you what I did that I think worked well to raise his awareness of personal finance:

I gave him an allowance from age 5. It was 5 dollars a week, and each year I raised it a dollar or 2.

I asked him to give me a dollar each week for savings, and we put it in a special "bank" at home. When we went on vacation I matched it dollar for dollar and he always had more money than he needed to spend on vacation. This let him see how savings added up, and how long term savings work.

I let him spend his money each week however he wanted. When it was gone, it was gone. So when he bought Pokemon cards or Baseball cards, that was it for the week. When he lost his first Gameboy, I didn't run out to replace it. (This was hard for me but I am glad I now about how I handled it!) I told him to start saving for a new one and use his Christmas or birthday monies to replace it. He survived, bought new one, and learned from this.

When he was in high school I made him get a part time job at age 16 that he held for about 18 months. Yes, he survived honors classes and wrestling and football practices with a part time job. He still has a CD with some of that money, and he maintained a 3.7 GPA.

Once he was working at 16, I explained how a ROth worked and showed him the miracle of compounding/growth of money over time. I offered to match whatever he would put in a Roth. Every year since, except one, he made enough money to give me something toward this account.

I did pay for his college since I can afford it. I am happy I was able to do so so he won't be burdened with huge loans.

I look forward to helping him when he has his first 401k. I talk to him about smart money choices whenever the opportunity comes up.

Finally, setting an example for financial responsibility is the best thing you can do.
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Old 05-22-2012, 08:14 PM   #17
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Originally Posted by EvrClrx311 View Post
I've been questioning lately whether I should open a Roth for my daughters as soon as they start to work and set aside an equivalent amount to whatever they make (babysitting, HS jobs, etc...)... or convince them to set aside some percentage that I'll match like employers to 401k's these days.
Anyone else been down this road and have some wisdom to pass on? Is it better to just teach them all the lessons and let them go at it on their own... encourage, but don't force?
Would I be better served applying those funds to my own Roth and plan to pass that down to them? I guess that would achieve the same goal without the risks.
Thoughts/Ideas/Suggestions appreciated.
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When you buy a firearm for a kid, you're pretty insistent that they should be properly trained in its safe use. As they demonstrate skill & safety proficiency, you could step up from a BB gun to rifle or a shotgun... or let them save their own money toward that purchase.

Same with saving & investing. You have to give kids enough money to learn how to manage it, even if you have to imagine them setting $20 bills on fire before they figure out how to manage their money.

When our daughter started working at age 14, she was pulling down a righteous $7.25/hour. By her standards, she was richer than Buffett. But by then she'd also learned to save for important purchases, and she had already felt the pain of self-imposed poverty. We were able to convince her to save 80% of her salary for her IRA. We also paid her for slave child labor around the house (jobs in addition to her chores) to push her closer to the IRA limits. By the time she graduated from high school, her Kumon franchise boss was paying her $11.25/hour. Our daughter maxed out her Roth IRA contributions when she was 15, 16, and 17.

She got off to a rocky start during her first semester at college, but she already had the basic skills and it was a matter of withstanding peer pressure. (Imagine rooming with a stinkin' rich kid of rich parents who has all the rich possessions and rich entertainment habits.) Once she got her spending under control (and found a different set of friends) she got back on the road to financial success... poorer but wiser. That poor little rich roomie unintentionally taught her as much in six months as we'd taught her in 18 years.

Spouse and I continue to pay our daughter for household jobs that she does while she's home, and she has a part-time college job. It's quite likely that she'll continue to max her Roth IRA during the college years, and she'll graduate with a starting Roth balance of ~$35K. The Navy claims that it has a job waiting for her, so she'll be off to a good start.

I obsess worry a lot about affluenza, and we were probably overly frugal when our kid was younger. These days she sees us open the purse strings a little more (like the entertainment expenses at last month's wedding). However we've told her that we plan to live so long that her inheritance would be worthless to her. Instead, we'd rather take an opportunity now to pass a smaller inheritance to her, and let her grow it in a tax-deferred manner.

She just moved off-campus. We've been paying $6200/semester for room & board, so we're happy to send that money straight to her. She has to make it last for six months instead of the college dorm's 4.5 months, but she was already budgeting for four people in a 2BR apartment. I think she'll figure it out. She gets to keep what she doesn't spend, so we hope we've aligned everyone's incentives. She worked really hard to find a cheap used car ($4200), even though I thought she'd have to go up to $8K.

Since she's more than hauling her share of the college expenses with her NROTC scholarship, we're happy to share the profits from whatever's left of the college fund. When she graduates, we can gift her enough to enable her to fully contribute to her Thrift Savings Plan account and her Roth IRA. That'll probably last for a year or two. If she's buying herself a Beemer and living an indulgent lifestyle, then we're done. If she's continuing to live frugally, and putting more of her own savings in taxable accounts, then we'll share more. We'll see how it goes. One advantage of sea duty is that you hardly have any time to spend money, anyway. Thanks a lot to the Navy for providing a supportive environment...

It's our money, but we're already financially independent. More of it wouldn't make a difference to our lifestyles. We could donate a huge stinkin' pile of filthy lucre to charity, but we already donate enough to make us feel that we're doing our share. Giving more wouldn't make us feel more virtuous. We could set it aside for her graduate degree, but I think that's her funding problem. We could buy her a home and rent it out until she's ready to decide whether or not to live there, but we already have a rental property. We could save for our grandkids' college fund, but I think we'd rather wait until we have grandkids.

Given all of our options, it seems to be a decent idea to put seed money in the account of a young adult who can leverage it for her financial independence. Instead of inheriting a million yuan bucks in 2060, she can start with a smaller amount and grow her own.

The fact that she's our daughter helps me feel that she has the skills to do a good job with it. So far so good...
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Old 05-23-2012, 09:14 AM   #18
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Thanks for all of the great advice!

I'm trying to think what my parents did for me that gave me the mindset I have today with savings, I'll try to use some of the same on my own children.

My earliest lesson with compounding was something my father set up called the "Bank of Dad"... in our family it was very common to receive a check or $50 bill for birthdays from relatives instead of presents. Usually we got around $150-200 for each birthday and Christmas (about $400 a year total) in this way. My father always automatically put that money into our accounts at the "Bank of Dad"... which I now know was just an excel spreadsheet he kept for us. The real checks went into his checking account.

"The Bank of Dad" was very generous and consistently paid out a return around 6% a year... looking back what I think he did was just compound our accounts by half a percent a month. He used to print out the spreadsheet showing the interest and balance every quarter and would give it to my brother and I (twins...)... the older I got the more I wanted to see the account. By the time I was in middle school he was printing them out twice a month for us. My twin brother and I always compared our numbers.

Around the age of 10 I just had to have a bike... so I decided to spend some of the money from my account. For the next 6 years (until we set up our own bank accounts and cut the cord for "Bank of Dad") I was constantly reminded that my account trailed my brothers... and what irked me most was that his interest was growing faster than mine so I would never catch up to him, at least not unless I put in more to make up for what I took out.

Looking back that stands out in my mind as the moment I realized just how powerful compounding was... I'm trying to find a good way to simulate the same thing for my own children. I like the idea of setting aside a part of the allowance automatically into the account, more so than just putting birthday money in there. I think that teaches a child to save money by month... and not just windfalls and bonuses (which is what I think I learned more from my dad's method). To this day, I still have a tendency to save the most from bonuses and tax rebates. I'm sure there is a connection there...
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Old 05-23-2012, 12:48 PM   #19
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Thanks for all of the great advice!

I'm trying to think what my parents did for me that gave me the mindset I have today with savings, I'll try to use some of the same on my own children.

My earliest lesson with compounding was something my father set up called the "Bank of Dad"... in our family it was very common to receive a check or $50 bill for birthdays from relatives instead of presents. Usually we got around $150-200 for each birthday and Christmas (about $400 a year total) in this way. My father always automatically put that money into our accounts at the "Bank of Dad"... which I now know was just an excel spreadsheet he kept for us. The real checks went into his checking account.
That's what we did for our kids. Paid 10% interest and generated transaction reports so they could see what their spending and interest income was. Towards the end the interest was exceeding their allowance.

One of my learning moments was when we decided to give the kids $10 to spend on vacation, for anything, instead of having us buy stuff they wanted. We'd go shopping, but instead of bugging us to buy everything in the store they hung on to their money. I don't think they ever bought any vacation junk again.
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Old 05-24-2012, 02:08 PM   #20
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One of my learning moments was when we decided to give the kids $10 to spend on vacation, for anything, instead of having us buy stuff they wanted. We'd go shopping, but instead of bugging us to buy everything in the store they hung on to their money. I don't think they ever bought any vacation junk again.
I can usually use this to stave off kid gimme gimme gimme requests. But I tell them to use their allowance money. For example if they decide they really want those $4 ice cream cones at a festival or at the mall, I tell them they can borrow the money from me and pay me back out of their piggy bank when we get home. Then remind them that is equal to 2 weeks of their allowance. And that we can buy a whole big carton of ice cream for $2 from the grocery store and have 10-15 cones at home.
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