If you have spare money,
Invest it wisely.
If you have spare money,
Invest it wisely.
Starting your family’s tradition of investing [under FAMILY TRADITIONS]
Childhood is the perfect time to learn about investing and responsible adults are the ideal teachers. The best way for parents to teach money management is by setting a good example. Parents can reinforce their example by playing financial board games and video games as a family activity. Assistance and supervision reinforce the development of good financial habits such as creating and using a budget. Discussions and field trips are powerful methods for showing children how adults use bank and investment accounts.
Desired skills and knowledge of young investors:
Copyright © 2019 Douglas R. Knight
References to books and online materials are sorted by age groups from pre-schoolers to grandparents. URL links are printed in blue letters to provide quick access to a website. Click the computer’s mouse on those letters.
Copyright © 2019 Douglas R. Knight
The spending of money, effort, or time to earn a profit or achieve a desired result (derived from the Cambridge Dictionary).
Mary Hill is an author of children’s books. Her set entitled Money Matters is designed to teach beginners how to count and use money. The book titles are Pennies, Nickles, Dimes, Quarters, Dollars, and Spending and Saving. These small thin books are easy for pre-school children to read and carry. About 18-24 pages in each book alternate between a simple sentence on the left page and a full sized illustration on the right page. The sentences are printed in large letters and illustrated with attractive photographs of real money and real people. A simple glossary is provided on the last page to facilitate understanding of the terms and pictures.
I found 2 of her 6 books in the Children’s section of our city library. In Dollars (ref 1), the U.S. dollar bill and dollar coin are described by appearance and cash value. Denominations of dollar bills are illustrated for $1 through $100. The attentive reader will quickly learn to recognize real money in contrast to play money.
In Spending and Saving (ref. 2), author Hill explained how earned income is saved and spent. Her pictures of adults at work show a healthy lifestyle for generating personal income. Children learn that they can save money by giving it to a bank teller or putting it in a piggy bank. The topic of spending money applies to choices among expensive items, such as a house, and everyday items such as groceries and school supplies. The attentive reader is exposed to several ways that adults earn money and use it wisely.
Young children who like to use computers can learn more about money at these websites:
Copyright © 2019 Douglas R. Knight
An emergency fund is used to pay 3-9 months of living expenses during unemployment. Keep it for retirement.
Unemployment means that you aren’t paid for doing work. People who either lose their job or retire from work are unemployed. Could you pay for living expenses during unemployment? If not, you should start building an Emergency Fund. There are two important savings plans during life: the Emergency Fund and Retirement Account (ref. 1).
The emergency fund is used to pay living expenses during temporary unemployment and other unusual expenses such as big bills. Workers should save 3-9 months worth of earned income in a secure savings account (ref. 2). That’s a difficult task when also planning to buy expensive items such as cars and houses, or paying-off college loans. Get a headstart in childhood by slowly saving cash in a custodial bank account.
The retirement account is needed to pay living expenses during permanent unemployment in old age. Contribute to your own retirement accounts as soon and often as possible (ref. 3). Begin by opening a Roth IRA during childhood when you start reporting earned income to the Internal Revenue Service (ref. 4). Employer-sponsored and Self-employed retirement plans should be opened at the first opportunity (ref. 5).
About forty to fifty years of regular investing are needed to build adequate savings for retirement (ref. 3). Plan on investing in quality securities such as stock index funds and government bonds (ref 1,6). Begin with stock index funds early in life and add the bonds late in life, finishing with a 90% investment in stock funds and 10% investment in bonds (ref. 7).
Retirement accounts have special rules for investing money (contributions) and removing money (withdrawals).
1. The Index Card. Why Personal Finance Doesn’t Have to be Complicated. Helaine Olen, Harold Pollack. Penguin Publishing, New York, 2013.
2. Emergency Fund Calculator, MoneyUnder30 . com: https://www.moneyunder30.com/emergency-fund-calculator.
5. Retirement plans: https://www.irs.gov/retirement-plans
6. Saving and Investing for Students, SEC resources for youth: https://www.investor.gov/search/node/students
7. Warren E. Buffett, Chairman of the Board. Letter to the shareholders of Berkshire Hathaway, Inc., 2013. Page 20, 2/28/2014.
Copyright © 2019 Douglas R. Knight
An excellent article in today’s newspaper (ref. 1) presented clear advice on how to become wealthy without paying hefty fees:
Numerous writers and seasoned investors offer the same advice. Find more useful information in references 2-6.
I recently shared stories about grandchildren with one of the partners in our investment club. Her 6 years old grandson and 4 years old granddaughter visit her every Saturday morning. Soon after arrival, the 4 year-old runs to the penny jar and puts a few coins in the piggy bank, counting their value during the process. It’s a play activity without feelings of ownership by the child. The 6 year-old performs chores for which he receives a salary of $2. He originally wanted $5, but agreed to $2 after negotiations with grandmother. In the near-future she will take them to the Dollar Store and let both of them spend a $1 anything they want. They will make the purchase and live with their decision. She wants them to learn shopping skills and the value of money. Later on, their father will open a savings account for them at the local bank. It’s the making of a family tradition.
SUMMARY: The cost of a 4-year college is over $20,000 a year and continues to increase at nearly 4% annually. Paying, not borrowing, is the better way to finance a college degree. Parents can start a payment plan early by investing in a tax-free “529” college savings account. Adults should avoid using their retirement savings to pay a child’s college expenses.
The more effort a family puts into creating a college budget, the better their student’s chance for educational and financial success. There are six important issues to address in the budgeting process:
High school programs which are designed to reduce the cost of college can prepare students for academic achievement and save them thousands of dollars in college expenses. Families are encouraged to consult teachers, counselors, principals, and colleges about available programs. Here are several types of programs:
Students who wish to get a bachelor’s degree can save money by transferring credits from a community college to a four-year school. Money is saved by paying less at the community college and taking fewer courses to graduate from the four-year school. Firstly, it’s important to earn an associate’s degree before entering the receiver school. Secondly, there’s a risk of losing credits during the transfer unless the participating colleges have an “articulation agreement” on which courses will be credited. Thirdly, the participating colleges may have a transfer agreement that guarantees admission to the receiver school. Try searching for information about “transfer students” in the school websites (ref 4).
Carefully selected online degree programs may provide another opportunity to reduce college expenses (ref 4). Other cost-reduction strategies include adequate, —not luxurious—, room & board, frugal spending habits during college, and graduation on time (ref 5,6).
Financial safety schools are those which are most affordable and likely to accept your academic credentials (ref 7). Here are some tips for choosing a college that satisfies your needs:
It’s cheaper to save than to borrow for college. I would like to join others (ref 9,10,11,12) in advising parents to own a tax-free 529 Savings Plan (“Qualified Tuition Program”; “QTP”) for the benefit of their young child. Owners of 529 savings plans receive favorable tax treatment on the investment returns. The best time to start is before birth or in the first year of the child’s life. It’s important to make regular deposits into the account, preferably by a payroll deduction plan. Here are some strategic details:
There are other tax-advantaged ways of saving for college (ref 12,16):
Investments in mutual funds and custodial accounts (UTMA/UGMA) offer an unlimited opportunity for funding college. However, the balances reduce the student’s eligibility for financial aid and the returns are taxable (ref 16).
Scholarships and grants are awards of ‘free’ money to students that don’t require repayment. The application process demands time and effort by the high school student, but it’s well worth the effort (ref 18). Guidance counselors, reference librarians, and college financial aid officers are excellent sources of help. Free listings can be found online (ref 19,20).
Students from high income families can rely on parents for financial help. Otherwise, they may need to earn money to pay for college. The work-study programs offered by colleges and private employers are good opportunities for students with a financial need (ref 21).
Student loans can delay college graduates from saving for retirement, a mortgage, and other big projects (ref 22). Still worse is the possible financial stress of paying a large debt (ref 9). Therefore, use student loans as a last resort. Federal student loans are generally the cheapest and safest when offered by the college financial aid office (ref 21).
The student’s immediate family and the college are counterparties to each other when it comes to paying for college. Grandparents, relatives, and friends belong to the category of third parties. Third parties are valuable sources of financial aid under the right circumstances:
Parents and grandparent-guardians should both avoid dipping into retirement savings to pay for a child’s college education. Instead, the child can earn income and apply for student loans.
Families who want professional help with the process of paying for college can hire a financial aid consultant. Before hiring a consultant, review the excellent advice given in references 23 and 24.
Students are required to submit a Free Application for Federal Student Aid (FAFSA) one year before attending college. Some colleges also require students to submit a CSS/Financial Aid Profile. The FAFSA and CSS Profile reveal how much a student can pay without borrowing money. It’s best if the student, with the help of the family, pays without borrowing.
1. Getting College Credit Before College. BigFuture, https://bigfuture.collegeboard.org/pay-for-college/college-costs/getting-college-credit-before-college.
2. Christina Tyman-Wood, What is an early college high school? https://www.greatschools.org/gk/articles/early-college-high-school/ , 3/7/2016.
3. Start college early. Rise Out, Inc. http://www.rise-out.com/start-college-early/ .
4. Taking Credit: How to Make Sure Your Course Credits Transfer When You Do. College Affordability Guide., https://www.collegeaffordabilityguide.org/transfer-credit/ .
5. Managing College Costs. College Resources. https://www.mycollegeoptions.org/Core/SiteContent/Students/Advice/College-Resource-Center/For-Parents/Paying-For-College/Managing-College-Costs.aspx .
6. 10 Ways to Reduce College Costs. Education Planner Org. http://www.educationplanner.org/students/paying-for-school/ways-to-pay/reduce-college-costs.shtml.
7. How to Choose Dream, Target, and Safety Schools. https://www.princetonreview.com/college-advice/dream-match-safety-schools .
8. College Affordability and Transparency Center, U.S. Department of Education. https://collegecost.ed.gov/catc/
9. Mark Kantrowitz, It’s cheaper to save than to borrow, Saving For College, 4/27/2018. https://www.savingforcollege.com/article/it-s-cheaper-to-save-than-to-borrow .
10. Mark Kantrowitz, How to save for a child’s college education before the child is born, Saving For College, LLC. College Savings 101, https://www.savingforcollege.com/article/how-to-save-for-a-child-s-college-education-before-the-child-is-born , 4/5/2018.
11. Frequently Asked Questions About 529 Plans, ICI Investment Company Institute, ici;org, https://www.ici.org/pubs/faqs/ci.faqs_529.print , 2014.
12. Tax Benefits for Education. Publication 970, Tax Benefits for Education, Department of the Treasury, Internal Revenue Service, https://www.irs.gov/forms-pubs/about-publication-970 , 1/31/2018.
13. Joseph F. Hurley and Brian Boswell, 2018-2019 Family Guide to College Savings, Saving For College, LLC. www.savingforcollege.com , 2018.
14. Robert Farrington, The Smart Way Grandparents Can Help Pay For College, Forbes/Education. https://www.forbes.com/sites/robertfarrington/2014/10/13/the-smart-way-grandparents-can-help-pay-for-college/#69ad07a17927 , 10/13/2014.
15. Safe Ways for Grandparents to Help with College Costs. Dowling & Yahnke, LLC. https://www.dywealth.com/resources/blog/safe-ways-grandparents-help-college-costs
16. Kathryn Flyn, 6 ways you can save for college. https://www.savingforcollege.com/article/6-ways-you-can-save-for-college , 9/1/2018.
17. Kathryn Flynn, When to consider a Coverdell ESA to 529 plan rollover. June 26, 2018. https://www.savingforcollege.com/article/when-to-consider-a-coverdell-esa-to-529-plan-rollover , 10/9/2017.
18. Kristina Ellis, Confessions of a Scholarship Winner. Worthy Publishing, Brentwood, 2013.
19. Scholarships. College Scholarships Org. http://www.collegescholarships.org/scholarships/ .
20. Finding and applying for scholarships. www.studentaid.gov/scholarships.
21. Federal Student Aid, U.S. Department of Education. https://studentaid.ed.gov/sa/.
22. Matthew S. Rutledge, Geoffery T. Sanzenbacher, and Francis M. Vitagliano. How Does Student Debt Affect Early-Career Retirement Saving? Center for Retirement Research at Boston College, May 2018. http://crr.bc.edu/wp-content/uploads/2016/09/wp_2016-9_rev.pdf.
23. Evaluating Financial Aid Consultants. http://www.finaid.org/scholarships/consultants.phtml .
24. Deborah Ziff, Decide if you need a private financial aid consultant, usnews;com, https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-07-05/decide-if-you-need-a-private-financial-aid-consultant , 7/5/2017.
Copyright © 2018 Douglas R. Knight
My Nov. 7, 2017, inaugural column for The Dispatch, “Civics education in schools needs reboot,” noted there are “loud” and “quiet” crises. An example of the latter is the decline in civic literacy, or basic knowledge of how our government works.
Another and equivalent crisis in the quiet category is financial literacy. For years, numerous polls and studies have revealed how little millions of Americans know about the basics of personal finance and investing.
A 2015 study of more than 27,000 people by the FINRA Foundation estimated nearly two-thirds of Americans could not pass a basic, five-question quiz covering credit, interest, diversification in investing, and inflation. Disturbingly, the percentage of those who passed had fallen from 42 percent in 2009 during the financial crisis.
Results of a survey of six age groups released in January by the National Financial Educators Council estimated that lack of knowledge of personal finance cost America more than $280 billion in 2017.
To compound the issue, we’re living in a consumer-driven society in which spending, especially for immediate gratification, is far more emphasized than saving and investing. The proof: the U.S. household savings rate decreased to 2.90 percent last November, the lowest rate since just before the Great Recession and near the record low of 1.90 percent in July 2005.
At a time when the millennial generation, the largest demographic group in history, enters its prime years of spending, saving and investing, it’s critical for that generation, as well as all Americans, to improve their financial literacy, especially before the next recession arrives.
How can poor financial literacy, an Achillles’ heel, be turned into a personal and national strength?
‒ As with physical fitness, financial health begins with good habits, and good habits begin in the home. Surveys have clearly shown that students who talk to their parents about money matters were more financially literate than those who did not. Parents must serve as models for disciplined spending and savings, educating their children along the way about the long-term value of such habits. Instead of lavishing their young with holiday or birthday gifts, they could open a savings account for them and make the first contribution to them to spark a savings mentality. Parents lacking financial literacy can access many online programs, including one offered by the American Bankers Association via its “Teach Children to Save Day” every April.
‒ Making saving as automatic as possible is the best way to build wealth and remove much of the temptation to make impulse buys. Those with little margin for savings can invest spare change through micro-investing apps such as Acorns. Those belonging to 401(k) plans or who have Roth IRAs should have the largest contributions possible deducted from their paychecks after accounting for the payment of truly necessary monthly expenses.
‒ Just as making civics classes mandatory in the classroom can develop more-informed voters, so too can requiring students to master a class in personal finance enable financial literacy before adulthood. Online courses in financial literacy could be customized for different grade levels for secondary schools. Many financial institutions that sponsor and promote financial-literacy programs could collaborate with teachers, quasi-governmental bodies, Junior Achievement, and other organizations to design such courses. A good governmental resource to build such courses can be found at https://www.mymoney.gov, which focuses on “The Five Principles” of Earn, Save & Invest, Protect, Spend and Borrow.
‒ Financial institutions also can educate young investors by sponsoring and promoting social events featuring crowd-sharing tips. Nothing motivates young people more than peer recommendations, and informal, free events featuring financially savvy young adults as ambassadors for financial literacy could be an effective grassroots-based tool. A good opening topic for an informal discussion could be credit scores, which many millennials are extremely interested in building and protecting.
Not coincidentally, April is “Financial Literacy Month,” the time when tax filings are due, 401(k) plans for the previous year must be established and funded and when many Americans receive tax refunds. Given the impact of the tax-cut bill and the opportunity some have for increasing savings in 2018, we have an ideal opportunity to reverse the trend of financial illiteracy and strengthen our financial future.
Jim Simon, is a central Ohio resident and former chief communications officer of several corporations.
Jim Simon: Financial literacy is America’s Achilles’ heel – Opinion ( – The Columbus Dispatch – Columbus, OH, Thursday, 2/1/2018.
Copyright © 2018 Jim Simon