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Start Kids Early

Finance

Issue: June 2009

By: Jerry Mosher, CFP

The current recession and the principle of compounded interest are two fundamental reasons to start educating your children about finances so that they have the opportunity to learn some of life’s financial lessons when they are young. This will allow them to use the knowledge over the maximum number of years and perhaps avoid future unpleasant experiences.

Talking with kids about the consequences of recession can prepare them for future recessions they will experience. To date, recessions come with the economic territory, which means that the more children know about the situation, the better equipped they will be to navigate through one. As an example, in a recession some people lose their jobs. This means it is important to build in some cash reserves to cover this possibility. It is useful to not be stretched to the limit with mortgages and debt because it reduces options and the ability to adjust. It is useful to keep fixed obligations in a tolerable range because discretionary expenditures can always be reduced if prudence becomes necessary.

I find a lot of parents want to shield their children from the consequences of recession rather than have them participate in the conversations and share in adjustments that may need to occur. The children will have their own recessions to navigate when they are adults, so why not train them now in what to think about and prudent actions to take. Perhaps review your cash flow with them as you look for things to cut. Share with them the fact that most of us have to select which preferences and compromises are the most important, rather than having the financial means to do it all.

As stated earlier, some people lose jobs in a recession, but not everyone. When it comes time for an employer to determine who has to go so that the business remains viable, the person who has the best chance of remaining is the one who is the most valuable to the company. In my opinion, this is the person who has continued to educate him or herself and make new offers of help to the company. Perhaps the current recession is the time to introduce the philosophy to your children, if it doesn’t already exist, that education must be a lifetime commitment in order to remain competitive, rather than a practice restricted to an early stage in life.

As to compound interest, time is your best friend, and children have the most time ahead of them. If you could earn 10% on your money (which, prior to last year’s decline in the market represented the 80-year average return from stocks) and you wanted to accumulate $1,000,000 at the end of the time, a 40-year horizon would require an annual deposit of $2,260; a 30-year horizon would require a deposit of $6,079 per year; a 20-year horizon would require a deposit of $17,460 per year; and a 10-year horizon would require a deposit of $62,745 per year. Obviously, the longer you wait to start, the more daunting the accumulation task! Current financial thinking indicates that a sum of $1,000,000 would produce about $40,000 of income in old age that could be adjusted to inflation. If your standard of living is greater than this, your investment pool will need to be larger, requiring an even larger annual investment commitment.

You might want to share with your children the benefit of starting to save early. If you have the resources, you could create matching incentives for funding a Roth IRA when they first begin to earn money. Birthday money could also be diverted here. Forty years of tax-free growth can make a significant difference in a person’s financial wellbeing.

The key is to start early and prepare children for an environment they will encounter. It’s in their best interest to start now.

Jerry Mosher, CFP® is a 30 year veteran of the financial planning industry and is president of Mosher & Ellis Financial Planning in Lafayette, California. He has been selected three times as one of the 150 best financial advisers for doctors by Medical Economics. Jerry may be reached at (925) 284-9470. Securities offered through AMERICAN INVESTORS COMPANY Member NASD/SIPC.

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