Rational Advisor

New Years is here, and mostly people make resolutions about themselves, and what they will change, or do. Most often these are never kept because it’s too easy to forget them. But, making a resolution to better someone else, does seem to work - Just ask my wife, her news resolution is always to get me to do one more thing! and slowly it’s begun to work - 17 years, measn I’ve learnt to do 17 more things!

Well, let’s take the same thinking with our kids

When we are dead and gone, I suspect only our kids will give much thought to us, mines are named Karishma (Krishy) and Arjun (Arj).

They’re my legacy, so I hope they do well and prosper in all of lifes activities — and I sure hope they remember me fondly.

Krishy and Arj are, of course, my children, now ages 11 and 9, respectively. Like any parents, I spend a lot of time thinking about my kids, including how I can best help them financially. I also believe they are our best investment in terms of a reflection of ourselves

This isn’t simply about coughing up dollars and cents, though the sums involved seem to be getting larger and larger. Rather, what it’s really about is passing along values.

Yes, I want my kids to be financially successful. But mostly, I want them to be competent, contented managers of their own money, so they don’t spend their lives agonizing over their finances and dogged by foolish mistakes. I don’t want them to be thinking that “If there wa a lay-off how would I cope?”.

How did your parents talk about money and finances with you when you were a child? And how is that different or similar to how you talk about money with your kids today? Finally, what single piece of financial advice would you like to share with today’s kids?I am not claiming to have the road map for every parent. We all have different values, different incomes and strong ideas about how best to raise children — and you will likely call me a bozo at some of the things I’ve done. With that caveat, here are a some ways I have endeavored to help my kids financially.

1. PATIENCE - WAITING UNTIL LATER

If children are to grow up to be successful savers and investors, they need to learn two key skills: How to delay gratification and how to take risks prudently. The first is easily the most important.

The Patience and self-control needed to delay gratification is associated not only with good saving habits, but also with things like succeeding in school and coping better with frustration and stress.

Yet this isn’t an easy skill to teach. Krish and Arj are growing up spending their parents’ cash, so they don’t have much incentive to reduce their desires. My response? Make them feel like they’re spending their own money.

One of my early tricks was the Coke Cola game, which I learned about from a friend. When my children were young and we went to restaurants, I would give them a choice: They could have a coke or they could have $1.

Krishy and Arj end up drinking a lot of water.

2. MAKE THEM RESPONSIBLE FOR THEIR OWN MONEY

We recently started a savings account for each of them. The accounts came with a cash-machine card.
Every three months, I plan to deposit pocket money for them in their savings accounts and, their clothing allowance as well. That way, they’ll learn to budget for a three-month period. More important, they’ll no longer ask me for money.

Instead, if they want to buy something, they have to ask themselves. I hope from this they will became more careful spenders.

Sound manipulative? You’d better believe it. But I also think of it as financial self-defense. Suppose Krishy and Arj don’t learn good money skills and grow up to be financial deadbeats. If they ended up deeply in debt, I can’t imagine not helping — at which point their financial problems would be mine. So, yes this is all about me retiirning and not needing to give anything to them out of my retirement money.

3. TALKING THE TALK

I haven’t just molded Krishy and Arj with financial incentives. I have also used family stories.

Values are passed down to our children in the stories we tell. My children may live in an affluent household in an affluent town. But I want them to know that their older generation struggled financially, and that they will likely have their own struggles. My father and Mother, worked very hard to get me to school and university, before that their parents worked hard to just put food on the table and so on.

So I talk about the small house in the UK where we all lived while their grandmother worked to make sure her husband could go to university. On one income, she put my father and her son through university, and prepared us to go to school each and every day before going off to work, and we squeaked by on one small sweet factory workers salary.

4. ALL THAT GLITTERS IS NOT GOLD

I have also encouraged my kids to be suspicious of displays of opulence, whether it’s the big house, the fancy car or the designer clothes. The fact is, this sort of spending doesn’t lead to lasting happiness, but it can create a heap of financial stress.

In belittling conspicuous consumption, I may be a little too strict, but there’s a reason. Krishy and Arj may have grown up hearing about their grandmothers sacrifices. But I grew up hearing a far more powerful story, about my maternal grandfathera and his four siblings, who in the 1940s were the beneficiary of what today would be a lot of money. My grandfather’s siblings quickly blew the money on high living. My grandfather blew his money more slowly, looking after his children and owning and investing in a large clothing factory in India. Making hs kids less financially savvy. Either way, the great family fortune was gone, and reckless spending was largely to blame.

5. UNDERSTAND ABOUT COMPOUNDING

When my children were young, I opened an investment account in a mutual fund that invests in Bonds and Dividends for each of them. This is a product I particularly like. Every month they can see the income stream come in, and see what money does and how it fluctuates and compounds Today, my kids’ low-cost variable annuities are each able to provide for their university education. Since inception they have been compounding at the rate of about 5.9%, with no twelve month period that was negative.

I have long been captivated by the idea of starting Krishy and Arj on the road to retirement. Think about it: The dollars I invested when they were youngsters might enjoy six decades of compounding.

6. HEADING HOME

When I bought my first home, my parents helped me financially, and I want to do the same for my kids. To that end, I have put aside $15,000 for each of them.

Even with a decade or more of growth, that $15,000 probably won’t be nearly enough for a 20% down payment. But it will give them something to build on.

I stashed Krishy’s and Arj’s $15,000’s in the same Bonds and Dividends mutual fund - Kept my life simple, and get them to understand the value of these vehicles as opposed to be led into “hot” investments

7. KEEPING SCORE

When my kids buy a house, they won’t just need a down payment. They will also want to have a good credit score.

With that in mind, I plan to list the kids as they get older (around 16) as a joint account holder on my credit card’s. That would mean the card’s credit history will added to their blank credit report.

Suddenly, they’ll look like a model financial citizen.

The reality is, a good credit score will help my kids get a lower mortgage rate, lower insurance premiums and a host of other financial benefits.

8. WEDDING EXPENSES

I am horrified by the way many families blow $20,000 or $30,000 on a single day of celebration for a wedding. My wedding was relatively less expensive, becasue of my parent’s frugal thoughts, and I am grateful for that - instead that let me spend the money on an absolutely wonderful honeymoon - just me and the misses and no others. Most of the wedding expenses are to impress others, that the following week will attend another wedding and forget about yours. Whereas the honeymoon is something of your only. Even there we didn’t use all the money,most of the money went into the purchase of our first home - an investment that is still paying off.

To put such wedding spending in context, consider this: According to the US Federal Reserve’s 2004 Survey of Consumer Finances, more than 96% of households headed by someone 65 to 74 had some savings — but the median value of these financial assets, including things like checking accounts, stocks and mutual funds, was just $36,100. (Canad’as number shoudl be similar)

Spending $30,000 on a party is not one of my values, and I’ll make sure my kids know it.

9. EDUCATION

While an expensive wedding is low on my list of priorities, a good education ranks near the top. I plan to pay the full cost of our children’s undergraduate education. Again, this was something my parents did for me, and we all tend to be heavily influenced by our parents’ behavior. I don’t want them to start out in debt.

10. SETTING EXPECTATIONS

As you might gather, I have talked to my kids a fair amount about money. They know they will graduate college debt-free, they will get some help toward a house down payment and they will receive some money toward a wedding. They know about the retirement accounts. I have also promised them a sum upon graduating college, to get them started in the world.

No doubt some folks will think I’m overly generous, while others might consider me cheap. Many will question my priorities. For instance, folks have told me that they would have skipped the retirement accounts and allocated more toward a house down payment.

But, frankly, the precise sums aren’t that important. Instead, what I am striving to do is set expectations. By detailing everything to Krishy and Arj, I hope to make it clear where I think my financial responsibility ends and where theirs will begin.

My kids have grown more interested as they have grown older in financial matters. They have also become more curious about the financial markets, and I can now chat about investing for at least 30 seconds before they reach for their Nintendo DS’s.

I hope enough of this will stick, and they will grow up to be prudent with their own money. The potential savings are huge. And, with any luck, they will remember whom to thank.

Thanks

Rational

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