060: Uncommon Sense in Kids

(How to Help Your Kids be Millionaires …when you aren’t rich.)

In This Episode: Can children have Uncommon Sense? Let me tell you the story of Colin Flynn, and then see what you think.

060: Uncommon Sense in Kids

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Show Notes

  • To help support Uncommon Sense, see the Patron’s Page, or the form in the sidebar.
  • Yes, I’m aware that there’s no “Roth IRA” in other countries, but I can’t keep up on all the possibilities worldwide, and expect that you will “translate” the concepts discussed to the options in your country.
  • Yes, I’m aware that there are some taxes withheld from kids, such as Social Security and Medicare. For this situation, I reimbursed the kids for what was withheld so that a full $50 went into each of their retirement accounts.
  • The compound interest figures are from the Investor.gov calculator.
  • I used this report on the Bank of America survey from CNBC.

Transcript

Welcome to Uncommon Sense. I’m Randy Cassingham.

Most kids — at least the boys — want a Nintendo for Christmas, and maybe some Nike gear, or an Apple product. For Christmas 2018, Colin Flynn of Woodbury, New Jersey, wanted something different: he asked his parents for money so he could buy …stocks.

Shares of companies, I mean. “It was pretty much the only thing he asked for that year,” says his mother, Kerri Sullivan.

So how the heck did he even think of wanting that? On a family trip to Disneyland, Colin, his mother says, “saw a statue of Walt Disney and asked me about it. Somehow, it led to a conversation about Disney being a publicly traded company, which led to a follow-up discussion about the stock market.”

“From there,” she continues, she and the boy “researched the stock market and investing, and we found answers to his many, many questions. His interest piqued, the conversations continued, which led to him adding ‘money to invest in the stock market’ to his Christmas wish list.”

Colin doesn’t just panhandle his parents for his investment money: he gets an allowance — if he does his chores. When he got his start on this, Colin was just 10 years old.

After Christmas, with cash in hand, Colin started to buy stocks. Sure enough, he invested in Nintendo, Nike, and Apple. And also Tesla, Starbucks, Chipotle, Uber, Amazon, Google, and — unfortunately! — Boeing.

About here, maybe you’re starting to think that Colin is from a rich family and you’ll never be able to compete with his resources, even though he’s “just a kid.” If you’re thinking that, you’re wrong! Over the first year, Colin invested just $420. Do you think you could come up with $420 over the course of a year to help secure your future, even if your future isn’t as far away as Colin’s? If you have the means to listen to podcasts, you almost certainly could. And then put this into the mix: do you have children, or grandchildren?

At the end of the first year, Colin’s $420 stock portfolio was worth $539 and change — a gain of 28.37 percent.

And here’s what that early start means for Colin: if he only put in that same $420/year each year, and continued his winning streak by keeping up that 28-and-change-percent rate of return, how much do you think Colin would have in his investment account when he hit the classic retirement age of 65?

Take a wild guess. $420/year for 55 years; if you multiply that out, that comes up to a total of $23,100 invested. Did you guess a million dollars? Ten million? Or did you go crazy and guess $50 million, or even $100 million?

If so, you’re still not even close: he’d have $1,755,286,027, and that’s if the compounding is done annually. If it’s compounded monthly — which is to say, at the end of each month when his statement is generated, they credit the interest at that time, which is much more likely — then he’d have not quite 9 and a half billion dollars. If compounded daily, by the way, it’d be almost $11.3 billion.

060: Uncommon Sense in Kids
Compound Interest chart: starting with $420, then adding $35/month for the next 55 years, and earning (an unlikely) 28.37 percent interest every year, compounded monthly. The green line shows the principal invested, which is $23,520 total. It looks like the red line is hugging the zero mark for a long time, but that’s due to scale: Year 40 shows the balance is $141.2 million! (Click to see larger. Via Investor.gov)

That is the magic — and the danger — of compound interest. Magic if you’re saving, devastating if you’re borrowing.

But OK, I’ll fully admit it’s really unlikely that Colin will get more than a 28 percent return year after year for 55 years. But then you should fully admit that it’s also pretty unlikely that Colin will only put in $420 per year once he’s an adult and has a decent job, rather than just $1.15 a day in pocket money!

Still, let’s stick with that $420-a-year figure for one more round, but instead of 28+ percent, let’s use the S&P 500 index average, which consistently over the decades has brought almost exactly a 10 percent return. Throwing that into the calculator at Investor.gov — I’ll put a link to it on the Show Page — starting with $420, then adding $35/month (times 12 that’s $420 per year), for 55 years, at 10 percent interest, compounded monthly, Colin would still have $1.1 million and change at age 65. (If you only come away from this episode with an idea of how much interest rates matter, you’ll come away from this episode with a lot!)

Using an index fund like the S&P 500, by the way, means no trying to “play” the market. No stock picking. And probably few or no fees. Just send the money in like clockwork — say, from a payroll deduction — and concentrate on living life. Investing doesn’t have to be hard. Hell, a 10-year-old can do it! The best time to start investing is when you’re a child. The second best time is now.

For Colin, I want to run a much more likely scenario, and I’ll stay with that 10 percent S&P fund average the whole time, and compounding monthly. Here are the parameters:

  1. Until Colin is 18, he puts in $35/month, which adds up to $420 a year, for 8 years. Year 1 is already over.
  2. Then when he hits 18, he goes to college for four years and puts every penny of his earnings into his education: he doesn’t save anything, but he lets his investment account sit and earn interest.
  3. At 22 he gets a decent job. He has a lot of expenses but he manages to save every month what he did every year as a teen: $420/month for the next 5 years, which frankly sounds pretty low for a guy like Colin, but let’s stick with it. That takes him to 27.
  4. Then he settles into life, and for the next 20 years he manages to save $1,500/month. That takes him to 47.
  5. Finally, Colin settles in to his high-earning years, enjoys some travel and finer things in life, and still manages to save $2,500 a month from his salary until he retires at 65.

Frankly, considering inflation that’s a pretty modest progression. With his attitude, I expect Colin himself will do a lot better than that. But those are our numbers. With these pretty conservative parameters, when Colin retires at 65 he would have $10,345,317.80.

To get to that $10.3 million, by the way, the total amount invested over his lifetime would be less than one million dollars — an average of less than $17,000/year over 55 years.

I’ll put the step-by-step calculations on the Show Page to document how I came up with these numbers.

  1. After 7 years (the first year is already accounted for, landing him at $539.15), Colin would have invested a total of $5,315.15, and then that sits earning interest until he’s 65 (47 years), for a total of $573,114.79. Total invested: $420/year for 8 years = $3,360.
  2. No additions, though the invested money continues to earn interest.
  3. This span, with $420/month added for 5 years, is worth $32,523.57 at the end. That then sits in his account until he’s 65 (38 years), for a total of $1,431,129.31. Total invested: $5,040/year for 5 years = $25,200.
  4. 20 years of $1,500 month. At the end of 20 years he’d have $1,139,053.25. Then that sits until he’s 65 (18 years), for a total of $6,839,665.61. Total invested: $18,000/year for 20 years = $360,000.
  5. Ah, the “golden” earning years: 18 years of $2,500/month. This portion lands him at $1,501,408.04. Total invested: $30,000/year for 18 years = $540,000.

The grand total: $573,114.79 + $1,431,129.31 + $6,839,665.61 + $1,501,408.04 = $10,345,317.80. The total invested over his lifetime to get there: $3,360 + $25,200 + $360,000 + $540,000 = $928,560 — less than $1 million, or an average of less than $17,000/year over 55 years.

Now consider this: I expect all of those savings numbers will fall well within the limits of a Roth retirement account, which means that when Colin starts taking that money out in his retirement, he won’t have to pay any taxes on it. That’s huge.

And then consider this: maybe he’ll work for an employer who contributes something to his retirement account on top of what Colin contributes. Maybe you think that’s unlikely for someone born in the 2010s, and I pretty much agree …which is why we absolutely need to teach this to our children or grandchildren today.

So that’s what I did. My wife, Kit, and I “adopted” three children several years ago. As volunteer medics, we became aware of a household that had a number of ambulance calls for a very sick divorced mother; the father had long ago disappeared and, as far as I know, doesn’t support them at all. Mom got so sick that she was in the hospital for not quite a year — and that’s when Kit and I started looking after her children from time to time, who were living with their grandmother. We made sure they got some Christmas and birthday gifts, some outings, and a couple of non-family adult role models. A couple of years ago, mom died. Grandma has custody and is doing the best she can.

Last fall, the twins turned 14, and their sister turned 16. As Christmas was coming up, I started to think about a gift that would be really meaningful. So I put the kids on my publishing corporation’s payroll, had them help consolidate two office storage sheds into one, and then sat them down. I told them they had a choice of how they were to be paid. They’d get $50 each now, or $7,268.50 later. Obviously, they wanted to know the catch: “We have to share that?”, one asked. No, I said, that’s $7,268.50 each. The catch is, that’s what that $50 will be worth in 50 years, when they’re ready to retire, and that’s when they’ll collect.

This got the kids thinking about their future — all the way to their retirement. And it got them thinking about what else they can do to earn money to put toward their futures. They seemed to understand everything I was telling them about the time value of money, and the magic of compound interest. I was gleeful that all three of them chose the delayed gratification.

As I said: they were thinking!

I had already called my own financial adviser to ask him if he’d accept these kids as clients, even though they wouldn’t have what he would normally require as a minimum balance for years. He not only said yes, but he said he’d waive his fees, too. He’s setting them up with Roth retirement accounts so that $7,268.50 — and anything else they contribute over the years — won’t be taxed.

Yet how many parents and grandparents set their children up for this kind of success very early in their lives? If you don’t just give kids an allowance but rather have them work for it and, perhaps counter-intuitively, give them their allowance as wages with some percentage being held in a Roth retirement account during this time when they won’t make enough money to be taxed on it anyway? Well, that’s a major head start on life, isn’t it?

Colin Flynn seems to have grasped this intuitively. So I’ll ask again: do you think children, such as Colin or, after a half-hour discussion, our so-called “adoptive” kids, have Uncommon Sense?

Frankly, I think most children are born with Uncommon Sense, but our school system, for the most part, beats it out of them.

You’ve heard that “the 1 percent” have most of the money now, and that pretty much everyone else is struggling. But in reality, those are doomsday headlines, and you shouldn’t let them discourage you. Here’s the reality:

The Bank of America just did a survey of the “millennials” or “Generation Y”, which is the generation born from about 1981 to 1996, or currently aged 24 to 41, asking them about whether they’re saving money. After all, headlines have said for years that the average American doesn’t have enough savings to pay for an emergency expense of $400, for a car repair or whatever.

What they found is that in 2019, 83 percent of millennials were saving money, compared to 63 percent in 2018. It gets better: 59 percent have $15,000 or more saved, compared to 47 percent in 2018. And 24 percent, almost 1 in 4, have $100,000 or more saved, compared to 16 percent in 2018. Yes, this includes retirement accounts, so those savings aren’t necessarily at their fingertips, but they’re strongly looking toward the future because as a group, they’re fully understanding they can’t depend on getting a pension from their employers, and maybe not from Social Security. But it doesn’t reflect their net worth, so the value of their cars, homes, or whatever is not included; this is investments.

“It’s a reasonably good economy,” says Andrew Plepler, the head of Bank of America’s global environmental, social and governance initiatives, “and so for those who do save and have been able to put money into a 401(k),” he says, “they’ve had some nice tailwinds.”

The same tailwinds Colin found in the past little over a year. I hope you’re benefiting too — and your children, and your grandchildren. Again, the best time to start investing is when you’re a child. The second best time is now. It’s very likely no one else is going to tell this to your progeny: it’s your job. It’s just Uncommon Sense!

The Show Notes for this episode are at thisistrue.com/podcast60, where you can see how I came up with the figures mentioned, a place to comment, and a place to contribute to help keep the show going without interruption by ads.

Just FYI there won’t be an episode next week since I’ll be out of town.

I’m Randy Cassingham … and I’ll talk at you later.

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2 Comments on “060: Uncommon Sense in Kids

  1. Awesome lesson. One question. Are the target savings intended to be realistic or just examples? I feel like $1500 a month in savings is high.

    Part of the idea was to show how differing amounts add up to at retirement if you leave it sitting long enough. So, for instance, $420/year for 8 years starting at age 10 (= $3,360) grows to $573K by age 65, while the $1,500/month for 20 years later in life (= $360,000 from age 27 — about 100x the savings required by the first phase) “only” gets you to 12x as much at retirement. You cringe at $1,500/month, but even a child could do $420/year (and probably more, if they understand its importance) and get huge benefit. -rc

    Reply
    • That makes more sense. I am definitely a big fan of investing early. Have been investing since I was 18. Thanks for the response.

      Wow, good for you! Wish I had known to. -rc

      Reply

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