So my son is due in about a month and we have received gifts of $300 for him. I am thinking about opening a separate account at vanguard to invest any money he is gifted over the early years. Then around 5 years old he will receive an allowance equal to a 4% WR paid weekly.
Assuming he was gifted around $300/yr between now and then and a 8% growth rate he would have around $2200 which is around $88/yr or $1.70 per week.
Eventually perhaps he would be able to earn more by helping around the house. Maybe we could pay him minimum wage and invest the money and permanently increase his allowance as a result. A $13/hr investment becomes $0.01/wk permanently. Work an hour a week and you get $0.52/wk for life after 1 yr. - work an hour a day and you are increasing allowance by $3.65 per wk for life. Probably would have to cap it there though or it would get too expensive.
Any gifts after 5 years old he could do whatever he wants, but I would offer to match anything he decides to invest. Maybe encourage him to spend 1/3, save 1/3 for a bigger purchase, invest 1/3 or some similar scheme.
Eventually I could gift the whole portfolio to him later in life after he settles down a bit. Perhaps after college if he decided to go that route.
Would give a ton of opportunity to discuss stocks, investing, perpetual withdrawal rates, etc. Maybe in the beginning he won’t understand the mechanics of it all but maybe by age 10 it would all make a ton of sense, and by then he would have a big head start. By age 18 I’m guessing the account would have between $30k and $150k depending on how much he earned and saved.
What do you think about this idea?
Congrats on your up coming addition to your family. It sounds like you have a lot of different goals and objectives idea. . All important. I think to get the maximum impact you have understand what you are trying accomplish with Jr, and make age appropriate so they can understand. Keeping it simple. This applies not only to finances, but generally raising your child, otherwise, much frustration from both parties.
It breaks down to growth of investments, teaching kids about money. The teaching kids about money is the part you need to look at on what is appropriate.
Investing in a separate account sounds great. This will help grow the money. We put in our kids gift money for years in a separate account, plus some additional for long term. As they have gotten older we let them decide how much goes in from their gifts (unless someone specifies what they want the girls to put it towards). They also do this with any earned money/allowances.
Allowances are great way to teach kids about saving, spending, and investing. I will leave it up to you if you tie it to work or not. We always believed that kids should do things around the house because they are part of the family. They still have to help, even if they don't want the money. The had chores have to do because they want to live in the house. Allowances were given to learn about money. We did $4 to start because that was enough to go over the different values of coins. Many kids don't understand that 1 quarter is worth more than a 5 pennies. They would rather have 5 of anything. At that same time with allowance, we taught worth/denomination value and the concept of save, give, spend. We had gave them guidelines on what they should be saving (50%) give (1o%), and spend (40%) in jars. The idea was always save the largest amount. They adjusted after a few years and ask to set their own %, but always the 3 areas.
You can choose to give more as the work around the house or do more than their 'base chores' How much you want to give is up to you and their age. I would be careful about too much. This is to teach that if you want to make money, you must earn it. Pick an amount either by task/results or by hour. I recommend by results because kids find a way to do things very very slowly if paid by the hour. Keep the investing out of the work. Your employee doesn't pay based on how much you have saved they pay by the hour or the result. This whole, you still focus on the save (invest), spend, give. Depending on their age wants, they will want to allocate the % differently, and that's okay, they just have to be able to rationally think it through on why they are changing things.
I would say your comment
receive an allowance equal to a 4% WR paid weekly. the 4% is going to mean nothing to the 5 year, especially on something so theoretical as an investment account that he can't see. I wouldn't even try to explain that other than, the more he puts save, the more it will grow.
A $13/hr investment becomes $0.01/wk permanently. Work an hour a week and you get $0.52/wk for life after 1 yr. - work an hour a day and you are increasing allowance by $3.65 per wk for life. The ideal of interest is one that takes patient and a lot of age appropriate explanation. I would keep their allowance or pay rate different than their investment rate.
Teaching about investing comes after they have a little savings and spending (which you never mentioned) When my kids were little we talk interest in terms of its something that you can either pay or receive. When we buy something that we don't have the money for, the person that gives us the money, we have to give back what we they lent us AND some money. If we give them money, they give us our money plus the extra interest. I didn't do compound interest until they are were almost 9 and had the foundations. Then I did a table that showed them how much they can make just with time if they aside. This lead to different types of investment. I just went into categories. My oldest didn't care, youngest was more interested.
You didn't mention teaching kids to spend, this is quite related to savings rate. Right from a young age, we never used the words, "We can't afford it' It was always (and still is) 'We choose to spend our money... x way instead' When they were little, before any purchase we would talk about the purchase, what else they could want or could buy with that money and let decide if it was worth it. If they still wanted it, we researched if there was a way to get it cheaper, wait for a sale ect. Then after the purchase we would discuss if it was worth it. We did this as young as 4. There was some things, I thought were stupid but if they walked us through it the logic and it made sense to them, and they had the money, then it was there choice. I actually think understanding the value of something is really important, not being cheap but understand why we think a purchase will bring us joy.
I think the key is keep talking to your kids, but break things into step and don't try to do too much at one shot especially when they are younger. If you think about their financial education is about saving which turns into investing, spending wise, giving back which is about not just being focused on money, and earning money which can also be covered other areas of work ethic. That's was a lot.
