Want to Get the Kids Out of the House? Maybe Start Them with a Starter Portfolio.

Ask SmallIvy

Many families expect to continue to support their adult children through college and often beyond.  The norm is to pay for their tuition, rent, utilities, food, cell phone, and even some entertainment expenses through college.  Ideally that would all end with graduation, with perhaps a brief visit home before starting off for a new job and a life of independence.  The new norm, however, is getting to be to continue that support until your son or daughter is 30 or even older.

The issue is that many college students are graduating with enough student loan debt to amount to a car or rent payment each month.  This makes it difficult for them to start an entry-level job and pay for both their loan payments and their living expenses while they gain the experience needed to get enough money to be fully self-sufficient.  They are also much happier living at home in a spacious home with free meals, particularly if their mom still does their laundry, while they are gaining that experience than they would be in a cramped efficiency apartment.

My parents did things somewhat differently for my sister and I than the norm, and it seemed to work well (if your definition of “working well” is to launch your kids out on their own after college).  From the time we were about 14 my parents started depositing money in a brokerage account for each of us and worked with us to pick investments and manage the accounts.  They were able to do this tax-free because their contributions were always under the gift tax allowance (currently something like $28,000 for a married couple to each son or daughter per year).  By doing this for a number of years they were able to build up a sizeable starter portfolio for my sister and I before we went to college.

Once at college, instead of calling Mom and Dad each time I had a bill, I would just use cash from interest and dividends on the investments or sell shares of stock as needed.  Because I was living very modestly and on scholarship, I was actually able to cover most of my bills from just the interest and dividends I was receiving from the investments.  I therefore had a reasonable portfolio to help pay for graduate school expenses after I completed my undergraduate degree.  With the portfolio, thrifty choices on schools (I went to UC Berkeley, where I got in-state tuition paid for by the grant for my graduate work instead of Stanford where I would see tuition bills of $20,000 per year), and some side jobs along the way, I was able to make it through school loan-free and still have enough in the portfolio to serve as a good emergency fund after graduation.

This worked out very well for my sister and I, but things could have gone really badly.  Since the money was put into a custodial account, once we turned 18 the portfolio was ours and our parents had no legal say on what we did with the money.  One of us could have blown the money on parties and junk, leaving us without the money needed to go to college.    It probably would have served us right to then need to drop out of college and get a regular job to earn the money to go back, but it still would have been a disappointment for our parents to see their hard-earned savings wasted.  Of course, there are also students who spend six or seven years in college on loans and never get a degree.  They then have both loans to pay back, often with help from their parents who may be consignees on the loans, and no degree to show for the money.

There are many advantages to using this method of college/early life funding rather than paying for expenses as they occur:

1)  You can help your son or daughter learn how to manage a portfolio of investments while still under your roof.

2) When your students go out on their own and start earning money from their portfolio, they will (possibly) be paying taxes at a lower rate than you since their total income will be a lot lower, so it may be better for them to be earning the money in their portfolio than for you to earn money in your own portfolio and then send the money to them for expenses.

3) When it is your student’s money, they will usually tend to want to save it rather than spend it, so they may be more thrifty with their college choices and spending while at college.

4) It will force you to save the needed money for their college before they go rather than hoping you’ll find the money somehow when they get there.

5) It allows you to tell them they’re on their own and that the choices they make are now theirs without worrying about them not having the money for rent the first month and ending up on the street.  There is security in having enough money to have a few unfortunate events without becoming destitute.

6) If they work a job in college, they may be able to fully fund an IRA with their wages since they’ll have the money needed for living expenses from the portfolio.

Still, giving them all of the money when they are 18 may not be the best option.  While legally adults, people make some pretty bone-headed decisions when they are 18-23 or so.  It is good to be able to give them a second chance if they screw up early but then learn their lesson and mature.  A second plan would therefore be to give part of the money when they head off to college, but then give the rest of the money as they mature and prove they can handle the wealth.  For example, maybe give enough for them for living expenses for the first two years of college before they turn 18, then continue to give them money through the gift tax exemption for the next four years after their sophomore year if they prove that they can handle to money and are making good progress in college.  This unfortunately will make it less likely that they will be able to pay for most expenses using just interest, but it does help protect the parents from spendthrift students (and gold-digging relationships).

Now one final “disadvantage” of starting your children with a portfolio is that it may well hurt their chances of getting financial aid.  Really, though, this should not be seen as a disadvantage at all.  Why is it that middle and upper-middle class families who have plenty of money to spend on cable packages, kitchen upgrades, Caribbean cruises, and big data packages for their phones need to go begging for charity when it comes to college?  Maybe it is time for families to put first-things-first and not accept public charity when they can pay their own way through better choices.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is Having Adult Children at Home Really That Bad?

The United States has always been a country of independence.  Adult children would normally leave home to go to college or to work at the age of 18 (or even at 16 or 14 during the 1800’s) and do everything they could to not come back home for more than a visit.  It was seen as a sign of maturity to have your own place and take care of yourself.  This was especially true of men, and few women would date a man who still lived at home with his parents before recent years.  This made sense since if a guy could not take care fo himself, why would you want to start a family with him?

Today this is shifting to where about a quarter of young adults return home after college and continue to live with their parents until late into their thirties or forties.  Even those that don’t still sponge off of their parents for many years for things like utilities, health insurance, and cell phone bills.  Money Magazine reports that many parents are now expecting their children to continue to be supported until they are maybe 25-30 as there is now a new transitional phase and children are continuing to be dependent longer.  The children are expecting that support to continue until they are 27-32.

Some of this change is due to millennials coming of age during the “Great Recession,” a term I use in quotes because it really wasn’t that bad in comparison with other recessions we had despite the news media playing it up as much as possible.  What is different, perhaps, is an increased difficulty in finding good full-time jobs, largely driven by the Affordable Care Act’s requirement that employers who have 50 or more full-time employees, defined as those that work more than 29 hours or week, be provided full coverage health insurance.  For many jobs where the employer doesn’t make that much per hour per employee, the only solution to stay in business is to cut all employees below that threshold.  This means that not only is a barista only making $8 per hour, he also can only work 29 hours per week unless he gets a second job.

The other difference is the expectations of millennials in what their living conditions should be.  Those before them mostly spent their 20’s in small 1-bedroom apartments, 2-bedrooms they shared with a roommate, or even in the rented room in a house while they worked their way from entry-level to better paying, higher-level jobs.  Some individuals now are expecting to move right into a four bedroom ranch with a bonus room like the one their parents have.   Not having the resources to do this, many figure it is better to stay at home and live rent-free.

America is somewhat odd, however, in the expectation that adult children leave home.  In many cultures, particularly in Asia, families all live in the same home, with sons bringing their wives into the home and eventually taking over their parents’ room and their role as head-of-household.  In many ways this makes sense.  Having several people supporting one home reduces the cost each must pay for upkeep and utilities.  In places like Tokyo children would probably never be able to afford a home on their own, at least for many years, and paying out high rents may make it difficult to ever save up enough to do so.  Living at home also provides readily available people to help watch and raise the children.  It also gives individuals more time to spend with their parents, children, and grandparents.  Moving out greatly limits the time you have to interact with your parents and grandparents, which is time many people miss once their relatives have passed.

The difference between these cultures and the new American culture, however, is that while adult children may still live at home, those in Asian culture mature and support the home while some in America live as perennial teenagers.  This is largely the fault of the parents who allow their children to sleep until noon, go without a job, and not contribute for rent and food.  Certainly continuing to do their laundry and not expecting them to help with cleaning and yardwork also is a contributing factor.

Perhaps adopting the Asian culture and having children live at home wouldn’t be such a bad thing if the children were given the responsibilities that any adult should have.  This first starts with doing everything needed to not place a burden on others, including paying for their food, doing their own laundry, cleaning up after themselves, and paying for other expenses they generate.  The next step would then be for them to really step-up and contribute to the upkeep of the home, including helping with mortgage payments, helping maintain and clean the home, and eventually helping with major household decisions.  By pooling labor and resources, this would help everyone in the household to live a better life financially than they could on their own.  They would also have a lot more time together.

Another aspect of Asian culture is that children care for their parents in their old age.  Living in the same house would also make it much easier for adult children to look after their parents in their declining years.  Many would probably rather not have this burden, but it seems only fair after the years the parents spent raising the children and helping with the grandchildren.  Living in the home would ensure that someone was there in the night to help as needed and professional nursing help could be hired during the day when the children were working to support the household.

While it certainly wouldn’t be the ideal choice for everyone, maybe having children stay at home is a good choice for some people.  The key is to require that they grow up and accept their share of the load rather than letting them continue to live as children with the advantages of being an adult.  In some cases this will help them leave the home sooner as they learn the skills needed to live on their own and they would rather have their own place than continue to live under the roof and rules fo their parents.  In other cases children may choose to stay at home their whole lives, but this would provide a lot of advantages to the typical separated American family.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is a Cell Phone a Need?

I’ve been reading through an article in Money on parents supporting their adult children well into their twenties and sometimes thirties.  One thing that is striking in the article is that in every case the parents were paying for their adult children’s cell phones.  This got me to wondering where a cell phone is a want or a need, and if it is a need, why do the parent’s cover the expense in every case instead of the son or daughter covering the cell phone and the parents covering something else less critical.  Is it expected that parents should cover their kid’s cell phones for ever because they start them on their family plan when they are tweens?  If parents didn’t cover their children’s cell phones, would that cripple their lives or just give more incentive to earn more and cover their own phone?  Money from delivering pizzas at night or mowing a few lawns would be enough to easily cover the cell phone bill.

Understand before you roll your eyes that I don’t personally own a cell phone and don’t really find it an inconvenience not to have one.  I find that I am normally near a phone at times when I would actually like to talk to someone, such as at my desk at work, or near the home phone when sitting on the couch.  I really don’t want to talk to people when I’m in a meeting at work or doing something else away from my desk because I’m busy with other things and don’t want to be interrupted.  (And by the way, those of you who are talking to someone and then stop to answer the phone and have a conversation while the person you were talking to is waiting are extremely rude, unless you are a heart surgeon and providing assistance with a surgery or something equally critical at the time.  Texting someone while talking to someone else is equally irritating.)  Likewise, when I am out and about I really don’t want someone calling to talk about something.  I usually won’t have the information needed with me if someone needs information and holding a private conversation with a friend with passersby listening in at the grocery store isn’t something I like to do.

I do understand that many people use their cell phone as their only phone and that having some means of communication is critical.  Still, adult children could get a flip phone for something like $15 per month.  That is about three hours at a minimum wage job.  You can get a land line for $9.95 a year according to one advertisement I heard.  I understand that it is nice to be able to play games, watch television on your phone, and use apps, but is that really a need that you should be asking your parents to pay for when you don’t make enough to buy it yourself?  Realize that while they may not say anything, continuing to support you can put a real strain on parents who haven’t been saving for retirement regularly and who don’t have that many years left.  Some parents may continue to work longer than they expected before retiring because they are supporting adult children.  Others may need to cut their lifestyle, not get to go on the trips they planned to take, or do other things because of the drain from supporting adult children.  Is it really worth it to affect other people’s lives?

Realize finally that if they run out of money, your parents will have little choice but to come and live with you.  Right about the time you are in your late thirties or early forties and thinking about taking some nicer vacations, they may come knocking with their bags in hand.  Suddenly you’ll be buying extra meals and an extra room at hotels when you travel.  Your home office or bonus room might become their bedroom or your guest room will always be full.  You’ll need to buy a bigger car to haul everyone around.  Again, is that cell phone really a need?

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Learning Investing from My Father

Many families never talk about money (or sex), seeing the subjects as taboo for discussion between the generations.  Schools have taken on the responsibility of teaching sex (although without teaching any of the morals, because that would be judgemental, teaching religion, or old-fashioned), but there is still very little taught in the area of personal finance.  Some students – generally the ones who the schools decide won’t be able to understand algebra,  and are therefore relegated to “consumer math” – may get some of the very basics on the mechanics of handling money.  They get very little good advice on budgeting and investing, however.  In fact, they are often taught how to do things like use credit cards and take out consumer loans – the things that many should really avoid.

Our family was somewhat odd in that we were investors, or at least my father was.  I remember from the age of nine or ten seeing him at his desk in the corner of our livingroom, a desk lamp shining on the sheets of graph paper where he would dutifully write down the closing prices for his stocks each day.  There were no websites to give you stock quotes.  He would use the stock tables in the C section of The Wall Street Journal which had listings for the NYSE, the NASDAQ, the American Exchange, and bonds and other investments.  He would write down the prices on one sheet and then graph them on the next, making a series of dots for the closing prices with a line connecting them.  He would use a four-color ball point pen to plot four stocks on each sheet of paper, each in its own color.  Each sheet of graph paper would last for about three months before he would need to start a new sheet.

I got interested in what he was doing and started asking questions.  Eventually, at the age of 12, I decided that I wanted to invest the money in my savings account – a grand total of $225 – in stocks and asked him to help me.  At that time a savings account would routinely pay 5%, which I thought was the standard rate that such accounts would always pay.  I didn’t know that inflation had gotten way out of control under the Carter Administration and that the Federal Reserve has raised interbank interest rates to 18% or more to try to kill the beast that was devouring savings.

My father pulled out his thick binder that held his Value Line Investment Survey as I had seen him do many times before.  We went to the back of the index section that had the stocks ranked 1 and 2 for Timeliness, a proprietary measure Value Line uses to rate how they believe  stocks will do over the next year.  Those with a “1” are expected to do the best, followed by those with a “2”and so on, down to the 5’s that are expected to lag the pack.  He set the criteria to find stocks that had a 1 or 2 for Timeliness and at least a 3 for Safety, another Value Line measure.  We searched through and settled on Tucson Electric Power, a utility that provided power for Tucson, Arizona.

The next day he called his broker and placed the order for 15 shares of TEP at $15 per share.  I remember how excited I was when the order executed and I was a stockholder.  We got a certificate sent to our home and I admired the elaborate art work with a goddess holding bolts of lightning in her hands.  It indicated that I was the proud owner of fifteen shares of stock.  I folded the certificate and kept it in my top dresser drawer for years until my father decided to take it to the safe deposit box.

My stock did very well, growing from $15 per share to over $75 per share over the next few years.  I signed up for the dividend reinvestment program and sent in additional money from time to time to buy more shares directly through the plan, brokerage-fee free.  I lost track of the prices I paid and my cost basis, making it so that I could never sell the shares since then I wouldn’t know what my capital gain would be for taxes.   I didn’t really care because I would get a dividend check every three months anyway so long as I held onto the shares.

Eventually the company got involved in a scandal.  Allegedly the executives were using the revenues from the utility operations to fund highly speculative ventures that looked good on paper but whose true performance was being masked.  The price of the stock tumbled quickly after the news came out, falling back to about $20 per share.  When I went to college, coincidentally in Tucson, there was a special shareholder meeting to enact a measure that would dilute the shares by issuing a great deal of additional shares in order to pay off creditors.  I attended the meeting and heard the complaints from longterm shareholders who held far more shares than me.  I held on anyway, partly because I didn’t know my cost basis, and saw the shares drop to less than $2 per share.  The dividend was eliminated for several years, but it was eventually restored and grew over the years to a respectable sum.

Along the way through my middle school and high school days I acquired shares in additional companies.  Starting from eighth grade I needed to file tax forms.  I never actually owed anything, but apparently I was above the threshold where I needed to file anyway just to prove to the IRS that I didn’t owe anything.  My family paid an accountant to prepare the forms, so we ended up paying out a couple of hundred dollars each year to file forms that did nothing other than prove we didn’t need to pay taxes.  That is one reason I’m a strong advocate of the Fair Tax.

As I got older my father and mother started putting money for my college and my early adult life into a brokerage account for me.  My father owned a large number of shares of Citizen Utilities that he transferred to me a little each year under the gift tax exemption.  I then sold these shares off and bought other stocks with the money, developing a portfolio of several stocks.  This ended up being a bad idea since I then got his cost basis for the shares, which was very low, and therefore owed quite a bit in capital gains taxes when I sold the shares.  Actually this might not have been a bad strategy overall since my tax rate was lower than his (I think capital gains were taxed like ordinary income at the time), but it resulted in a net transfer of less money to me.  In any case, I was able to pay for college expenses using the portfolio rather than calling home for money each time I needed it.

I also remember in grade school and high school sitting with my father each evening at 5:00 when the Nightly Business Report would come on PBS.  We would watch the show for the first 15 minutes as they went over the movements of the Dow and other indices for the day, the closing prices of several large  and widely held stocks,  and the biggest gainers and losers.  Once in a while I would see a stock that I owned rise or fall dramatically.  If it did not show up on that segment of the show I would need to wait for the next day to read about the closing prices in The Wall Street Journal from the stock tables.

On Saturdays my father would get his issue of Barrons magazine, the weekly sister publication of The Journal.  I enjoyed reading the column by Alan Ableson.  He always had a very witty column that lead the magazine, called “Up and Down Wall Street,” that reviewed the happenings for the week.  I usually had a dictionary nearby because he would use large words not found in normal newspapers that are dumbed down to a fifth grade level.  I found when studying for the SAT that my dad knew every vocabulary word on the list, probably from forty years of reading Barrons.   The column was always very depressing; Ableson was the eternal pessimist who could find the dark cloud in any silver lining.  I can remember very few times when he didn’t think the market was going to hell in a handbasket.  Still, he wrote in such a humorous way you would laugh through the tears.

Sadly my father developed dementia in his later years and became unable to maintain his portfolio.  He also became very concerned that he had lost all of his money, apparently a symptom of the disease since I checked on the value of his accounts (for the first time in my life) and saw that he was in fact doing fine.  My mother was also unable to manage things, being used to having her husband just take care of the finances, so I obtained power of attorney over the accounts and began to manage them for my parents.  At one point I got my own subscription to Value Line but would still periodically flip thorough his old binder when I was home for a visit.

My father eventually suffered a fall, went into a nursing home, and then passed away a couple of years later.  My mother subsequently passed about seven years after him.  This left me in the oldest generation of our family when I was just in my late thirties.  I was certainly able to take care of myself and my own finances by that point, but I miss the connections to our family history that went with them as they left this earth.  There are many questions I never asked and now have no way to do so.

About a year ago I was flipping through the channels on a Monday afternoon and saw that the Nightly Business Report was coming on.  The white-haired host that I remember was gone, replaced by a tag team of anchors.  Still, they followed the familiar format of the show for the most part and I remembered sitting there in our old family room with my father.

Then last year, after not reading Barrons for a while, I picked up a copy and wondered if Alan Ableson was still writing his witty “Up and Down Wall Street” column.  I was greeted by a series of remembrances from other columnists from Barrons and elsewhere and an article on  the passing of Alan Ableson, who apparently had died during the previous week.  I was amazed that he had written that column for so many years, right up to his death and several years after the passing of my father.

With Ableson’s passing, one of the last connections I had with my father was lost.  Barrons still has an “Up and Down Wall Street” column, but it lacks Ableson’s humor and eternal pessimism.  I still think of my father though each time I pull out my thick binder with The Value Live Investment Survey to find new stock picks.  They now have an online version, but I find I like to leaf through the pages in the print edition and look at the price trends.  I also like to go to the tables with the high Timeliness stocks in the back even though I rarely find a stock that way anymore.

Just this last week, I received a notice that the holding company which Tucson Electric Power had become, Unisource Energy, had been bought out in an all cash deal and that I need to send in my certificates to get paid for the shares.  I guess my plan to keep the shares until I died and enjoy the quarterly dividends all the while so that I would never need to find the cost basis has been foiled.  I will probably need to simply set it at zero for many of the shares and pay the extra, unowed taxes since I can’t prove a higher cost basis for many of the shares and it would cost more to track down the basis that I would save.

There is provision in the paperwork that the transfer company sent with the notice of the sale where you can say the certificate is lost, sign a statement to that effect, and forgo$1.80 per share to insure against a certificate being sent in later by another party.  Perhaps I’ll do that so that I can keep the certificate I have for 15 shares, purchased at $15 per share.  That piece of paper with the goddess holding the lightning bolts is worth a lot more to me than the $27 dollars or so I would give up by holding onto it.  It brings back the warm summer afternoon where I searched through Value Line with my father when he was still in his investing prime.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Setting Up an Investment Account for Children

Many parents provide little in the way of financial resources directly to their children other than perhaps help with college expenses or initial assets such as a car.  Others provide resources as needed, like help with rent or money for necessities, but continue to treat their offspring as a child with tight control over the financial decisions rather than as an adult who can make their own decisions provided the assets needed.  Providing little may build character and pride for those who succeed, but increases the chances of failure since what would be small events for someone with some money set aside become huge events for those without.  Doing so also increases the chance of them buying many things through loans, meaning that resources gained through work will be lost to interest.

For those parents who are able, meaning those who have lived below their means and therefore have the resources to do so, a better option is to set their children up with an investment account.  If this is started while the child is a tween or a young teenager, the child will be able to learn investing skills under the guidance of a parent, making them better ready to manage their own investing when they leave home.  If they then have a portfolio of assets when they start the adult stage of their lives, they will have a safety net when needed and also have the means to acquire needed items with less debt, meaning that more of their effort at work will go into building assets and providing necessities and less will go to interest.  This will be like making perhaps ten times as much over their working lifetimes.

The steps for setting up an account and getting your children learning about investing are as follows:

1.  Decide whether individual stocks or mutual funds are more appropriate.  Based on the age when they are starting and the consequences of bad investment, this is probably one of the best times to be investing in individual stocks.  Many investors may not want to take the time required to pick stocks or deal with the fluctuations in value, however, in which case mutual funds would be the better choice.

2.  Determine where to setup an account.  For individual stocks or ETF buying, this would be with a broker, either in person or online.  For mutual funds, an account should be setup at one of the mutual fund companies.  Because they are a minor a parent will need to be the custodian and sign things as needed.

3.  Determine how to fund the accounts.  The easiest way to fund accounts is using the gift exemption, which allows parents to give up to $14,000 each ($28,000) per couple to their children per year.  There are also ways to give more without incurring tax penalties, but these reduce the amount that will be tax-free in an inheritance.  See a CPA for more details.  Realize that if they start making money investing that they will soon need to file income tax returns.

4.  Sit down with them and choose investments.  This, or course, involves teaching them how to invest.  You want them to have some say in the selection of stocks or funds so that they learn the skills needed but not make really bad choices.  If choosing individual stocks, one method is to select a group of stocks and then allow the child to determine which of the group to purchase.  With mutual funds, the parent can specify the types of funds to purchase and then the child can select the specific funds.  For example, the parent could specify buying a large cap and a small cap growth fund.

5.  Get them involved with the paperwork and the taxes.  Part of managing their accounts is knowing how to store the needed information and prepare the taxes each year.  Show them how to save and track the cost basis for their investments, what information will be needed should an audit occur, and how to prepare and file the tax paperwork.  Even if they do not do the taxes directly, they should still study the returns and verify that the information is correct.  Note that using an accountant is often a good choice if you invest since the rules can be very complicated.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is an Initial Nest Egg Better than an Inheritance?

It was found from a recent Pew Research survey that about 36% of adults aged 18 to 31 were living at home with mom and dad.    This has been greatly hyped by the news, but really it isn’t as alarming as they make it out to be.  Digging deeper into the data, we see that 65% of 18-24 year-olds are living at home, but only 16% of 25-31 year olds.  Since a lot of the 18-24 year olds might be going to college or a trade school, it actually makes a lot of sense for them to live at home if they can (since the parents would typically be paying for an apartment for their adult children otherwise anyway while they were finishing school).  If more than one out of three adults were coming home from college and moving back into their old bedroom, that is more of an issue.

Looking at the longer term data as well, we see that a lot of young adults have always lived at home.  Back in 1960 32% of those aged 18-31 lived at home.  The big difference then was that those not living at home were very likely to be married (56 %) versus today (23%) where people are waiting longer to get married.  What the probably means is that a lot more young adults are going to college and then going into careers, putting off getting married until their careers get going.  No doubt the much more liberal attitude towards premarital and even recreational sex plays a role in this trend.

Still, there are certainly a lot of young people coming back home, having completed college and not found a job, or having tried to live on their own.  Others have not been able to maintain an apartment due to a job loss or their hours being cut in preparation for the roll out of Obamacare next year.  One of the biggest issues is that those  starting out have little or no emergency fund and also don’t make enough to build up an emergency fund very quickly.  Perhaps if they started out with enough money to pay for rent and food for six months to a year, they would be able to get back on their feet without coming back home to live in the spare bedroom.

Maybe instead of leaving a big inheritance for children when they are in their fifties and (hopefully) have built up plenty of money on their own, parents who have saved and invested enough to become financially independent in their forties should consider providing their children with starter money for their lives.  This could be done through gifts each year.  Currently the federal gift limit is $14,000 per year.   This means that parents could give their children up to $28,000 per year ($14,000 per parent).  (Although check with a CPA about this.  As the IRS says, this stuff is complicated.)  Start when the child is 15, and they could leave the house with over $110,000.  The investment return from such a nest egg would be something like $10,000 – $20,000 per year), meaning they would have plenty to fund a good portion of their living expenses for years if they get a modest apartment ($300 per month = $3600 per year)  and live frugally ($200/month on food = $2400 per year).

The idea here isn’t to create a trust fund baby that will live on the money for a while, eventually blow through it, and then come back in their mid-thirties looking for more.  The idea is to give them the cushion they need to get started in their careers.  By knowing they have the resources to spend a few months looking for a job, they can find a job that is right for them.  It will also help them in their lives to stay out of debt or at least limit it.  They will have the cash to buy a quality used car and avoid a car payment their whole lives.  Likewise, they’ll be able to put 20% or more down on a house, avoiding PMI.  All of this will mean the ability to keep more of their paycheck, increasing their ability to grow wealthy.

Of course, there are a lot of 18-year olds who can’t handle such a large sum of money.  They will blow it on stuff.  Some will find a boyfriend or girlfriend heavy in debt or with other issues whom they “know they can change” and give a large amount to them.  Some may even get sucked into a cult, get lost in an addiction, or just not  grow up and move on with  life because they think they can just live on the money they have.  The trick is finding out which ones can and setting up appropriate safeguards for those who can’t.  Some ideas:

1) Instead of giving away all of the money to them when they turn 18, continue giving them gifts as young adults.  There is nothing stopping you from giving them half of the money when they leave home and the giving them the other half over a few years once they graduate from college, turn 25, get their first job, or meet some other milestone.  This will force them to do the right things to succeed to get the additional money and also give you time to see how they handle the initial money you give them.

2) Instead of giving the money to them initially, set up a special account in your name, and then send them a check for a portion of the investment return for a period of time.  Show them that they can have cashflow from the money indefinitely if they just spend the interest rather than spend the principle.  This will also reduce the amount they have available to spend, making the need to get employed to add to their income apparent.  Once they are sufficiently mature, you can start giving the principle to them over a period of years.

3)  Start out early as teenagers and involve them in the planning and investing.  Rather than just investing the money and keeping it a secret from them, show them how to invest and have them help with the investment decisions.  Also, have them help with the taxes for their account each year, which will happen when the account value builds up.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Should We be Putting Our Children to Work During the Summers?

Really the whole school schedule has become somewhat antiquated.  In the past school ended in the summer because that was when the children were needed to help raise the crops and care for the animals and the land.  A child might also miss school in the fall if there were crops to harvest or lumber to haul.  Gathering ice in the winter might also mean a few days away from school.  Many children looked forward to going to school since it meant a little time away from their chores.

Today children come home in the summer still even though few work on the farm or even help with the maintenance of their homes and yards.  To make it even worse, there are a lot of families where two parents work outside of the home, meaning teenagers are left alone and younger kids are sent to a sitter or away to camps.  They generally play video games and watch TV and YouTube videos.  Some kids are still glad to go to school again – this time out of boredom.

Still, it would be difficult to change the system.  Children are used to long summers off.  School systems are not ready to cool a school through the summer and most busses have no air conditioners.  Teachers are also used to working only 9 months of the years.  Despite complaining about the low pay only working a 3/4ths time job provides, the truth is many choose teaching in part so that they can have some time off to be with their children and do other things besides work during the summer and winter breaks.  I doubt many would take another job to cover the summer and the breaks if one were available, not that I would blame them.

Still, it seems like children could be doing something more productive to help them get ready for life during the summers.  Obviously older teens can get a summer job, and many have – at least before the rising minimum wages and regulations made fewer jobs available.  It seems like younger children could be doing something more as well.  Maybe not for money, although running and working a pet sitting business of a yard care business could help them learn the value of work, some aspects of running a business, and some skills with money management.

There are other productive, creative things they could be doing as well, though.  Perhaps they could be writing a short story or even a novel.  Maybe they could be tinkering with some old electronics or writing computer games rather than just playing them.  Perhaps they could be doing some science experiments – using the internet to track earthquakes or asteroids, or doing some biological experiments with plants.  Perhaps they could be doing some elaborate art project.  Or maybe they could be going to the office with mom or dad and helping out with things.

Certainly childhood is a unique time and there should be a lot of time for fun and adventure before going into the working life of adulthood.  Still, surely there are a lot more substantial things to do besides watching music videos and playing video games.  Any thoughts?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.