Kids Only - No Adults Allowed

Brian A Boyd, ChFC®, CFP®

March 20, 2019

Dear Kids,

I’m often asked by your parents how best they can begin teaching you basic financial concepts. This post is just for you. Regardless of age, there is something in here for everyone.

Today, I’m going to give you 4 basic tips that will put you squarely on the path to a financially successful life. By following my advice, you’ll have enough money to call your own shots, enough money to follow your passions, and enough money to travel this beautiful planet earth.

Let’s face it, your parents want what’s best for you but they’re always telling you what to do. I think this message may be better received if it comes from good old Uncle B! Now, what I’m about to describe sounds very simple, but it is not necessarily easy. If you’ll trust me, read through to the end, and work on just a few basic principles you will live an abundant and financially care-free life.

Ready to get started?

#1: Embrace Delayed Gratification

Have you heard of the famous Stanford Marshmallow Experiment1? In the late 1960s and early 1970s Walter Mischel, a psychology professor, conducted a study on children between the ages of 3 ½ and 5 ½ . The children were seated at a table and presented with an attractive, tasty marshmallow. They were given the choice of either eating this one marshmallow immediately or if they could wait 15 minutes, they could have two marshmallows. Imagine being that age and faced with that decision. What would you do?

To their credit, most of these kids did everything they could to avoid eating the first marshmallow. They closed their eyes, sat on their hands, fidgeted, and some even stroked the marshmallow like a pet. Ultimately, a full one-third of the kids made it the entire fifteen minutes and were rewarded with a second marshmallow. They could then eat two marshmallows at once! You can find funny videos of kids being put through similar experiments on YouTube.

The children were then tracked many years after the experiment, and can you guess what they found? The kids that delayed their gratification by waiting also showed more success in life including better test scores, higher educational attainment, and even lower Body Mass Index (BMI).

How does this relate to being good with money? Effective financial planning requires an immense amount of delayed gratification, but this concept is woven into just about every positive decision you will make throughout your life. I would argue practicing this is one of the secrets to overall happiness.

You have already used delayed gratification many times and may not have even realized it. When it comes to your homework and video games, you know homework comes first. How much better does it feel to play that video game knowing your homework is already complete? I bet you’ve also been forced to finish your healthy dinner before being allowed to enjoy dessert. This is delayed gratification in everyday life. You’ll see even in the following points, this forms the core of successful money management and, once embraced, will serve you well.

#2: Practice Becoming a Millionaire

It’s never too early to practice becoming a millionaire. Imagine you have received $200 cash for your birthday. You could use this cash to immediately purchase one totally awesome gift for yourself. You could also buy nothing now, instead depositing that $200 in your savings account at the bank. That doesn’t sound fun but stay with me for a second.

By putting this money in the bank, you will earn interest which is free money paid to you by the bank just for leaving it there and watching it grow over time. By electing to save this $200 and allowing this money to grow, you forgo the gift now so that with time and growth you can potentially buy 2 or three amazing gifts in the future - maybe even a bike or a car!

It doesn’t have to be all-or-nothing though. Why not buy yourself one pretty cool gift for $100 now while saving the other $100 in your bank account? Create a balanced approach to saving and spending. After all, life is too short (enjoy today) but it can also be very long (you will very likely live well into your 80’s).

Ok, so the basics of becoming a millionaire involve creating and practicing the commitment to save a portion of every single dollar you receive or earn. Can you do that? Great! Now, let’s expand on that a bit and get rich.

#3: Become a Millionaire - the “Easy” Way

When you start your first job, perhaps in your teens, would you promise me that you’ll consider opening an account called a Roth IRA? You can open it immediately at any bank or online brokerage and as long as you are paid through a company with taxes deducted and reported to the IRS, you can contribute 100% of your total pay up to $6,000 per year. This may be a lot of money at first, so if this is too much, I’d like you to commit to contributing at least 20% of each paycheck to this account.

Yes, that’s 20% less you’ll have to spend at my favorite places like Starbucks and Chipotle, but that’s a lot more money you’ll have for REALLY cool stuff in the future. Remember it’s all about balance.

What if you recently graduated college and you’re starting to save now? No problem! According to an annual study conducted by Korn Ferry2, the average starting salary for a college graduate in 2018 was $50,390. If you were to save just 20% of your after-tax income (assume an 18% combined effective federal and state income tax rate) starting at age 22, you’d be putting away $8,264 between your Roth IRA and your company’s 401(k) plan. If these dollars were to compound tax-free at a hypothetical 8% rate of return3, you will be a millionaire by age 52!

#4: Stay Out of Debt

The positive habits we just discussed can all be countered and destroyed with improper debt management. Debt is borrowing money from an individual or a bank and promising to pay that money back plus interest. In general, most debt is bad. A low-interest mortgage to buy a home or taking out a loan to start a business could be considered good debt. The rest is usually bad and should be avoided at all cost.

At some point you were or will be offered a credit card. This can be awful debt. Having a credit card is extremely important to building a credit history which you will one day need to buy a car or a home. However, there is a downside. Through a credit card, a bank is essentially extending you a loan from month to month. When you swipe that card to buy something, it is accounted for by the bank and after 30 days a bill is sent to you with a list of charges on it.

Your options for paying this bank back are to either pay the entire balance off or to pay something less than the entire balance. If you pay the entire balance, the bank does not charge you anything (interest) for extending you that short-term loan. However, if you don’t pay off the full balance, the bank will charge a ridiculously large amount of money (interest) with the current average credit card interest rate of 17.64% per year4. Imagine how negatively this compounds against you month after month after month until the balance plus all the interest charges are mercifully paid in full.

As an example, I looked at my current credit card statement. Of course, I pay the balance off every month, but what if I didn’t? According to my statement, if I only paid the minimum required monthly payment and never used the card again, it would take me 19 years to pay off the charges I made just this month. What’s worse is that by then I would have ultimately paid more than twice as much as the current balance. Said another way, every single item that I purchased this month would cost me more than double over time because of the high-interest charges. Would you pay $7 for a gallon of gas or would you drive to the next station to find a better price?

The banks want you to spend as much money as you possibly can on your credit card so they can charge you interest. This is one of the ways they make money. In fact, they want you to spend even more than you can reasonably afford just so they can charge you ridiculous interest. They will give you a total amount you can charge (credit limit) which is usually much larger than you could pay back in any one month.

Don’t be a sucker. Just say no! It is good to use a credit card to conveniently pay for your normal expenses while building your credit, but then you MUST pay off the full balance at the end of every month. If you do that, you’ll forgo the hottest newest item that you can’t afford while building a spotless credit history and ensuring compound interest does not work against you.

Get Started

Go forward confidently with your new knowledge of the 4 key ingredients to a successful financial life. Coincidentally, these ingredients make for an overall happy life as well.

I’ll leave you with a saying that must become your moto as you set you out to build your financial success - “Don’t buy things you can’t afford with money you don’t have to impress people you don’t like.”

Help us get the word out to other great kids by sharing this with those you care about.

If you have questions about your finances, please reach out to us. We are always happy to talk with you about these or other money related matters.

Happy Planning,

Brian