How To Teach Your Kids About Investing
As kids enter their teenage years, as a parent, you begin to teach them more advanced life lessons that they will hopefully carry with them into adulthood. One of the life lessons that many parents teach their children early on is the value of saving money. By their teenage years many children have built up a small savings account from birthday gifts,
As kids enter their teenage years, as a parent, you begin to teach them more advanced life lessons that they will hopefully carry with them into adulthood. One of the life lessons that many parents teach their children early on is the value of saving money. By their teenage years many children have built up a small savings account from birthday gifts, holidays, and their part-time jobs. As parents you have most likely realized the benefit of compounding interest through working with a financial advisor, contributing to a 401(k) plan, or depositing money to a college savings account. As financial planners, we often get the question: “What is the best way to teach your children about the value of investing and compounding interest? "
The #1 rule.......
We have been down this road many times with our clients and their children. Here is the number one rule: Make it an engaging experience for your kids. Investments can be a very dull topic to talk about and it can be painfully dull from a child’s point of view. All they know is the $1,000 that was in their savings account is now with their parent’s investment guy.
Ignoring the life lessons for a moment, the primary investment vehicle for brokerage accounts with balances under $50,000 is typically a mutual fund. But let’s pause for a moment. We have a dual objective here. We of course want our children to make as much money as possible in their investment account but we also want to simultaneously teach them life long lessons about investing.
The issue with young investors
Explaining how a mutual fund operates can be a complex concept for a first time investor because you have all of these companies in one investment, expense ratios, different types of funds, and different fund families. It’s not exciting, it’s intimidating.
Consider this approach. Ask the child what their hobbies are? Do they have a cell phone? Have them take their cell phone out during the meeting and ask them how often they use it during the day and how many of their friends have cell phones. Then ask them, if you received $20 every time someone in this area bought a cell phone would you have a lot of money? Then explain that this scenario is very similar to owning stock in a cell phone company. The more they sell the more money the company makes. As a “shareholder” you own a piece of that company and you receive a piece of the profits if the company grows. If your child plays sports, do they wear a lot of Nike or Under Armour? Explain investing to them in a way that they can relate it to their everyday life. Now you have their attention because you attached the investment idea to something they love.
A word of caution....
If they are investing in stocks it is also important for them to understand the concept of risk. Not every investment goes up and you could start with $1,000 and end the year with $500, so they need to understand risk and time horizon.
While it’s not prudent in most scenarios to invest 100% of a portfolio in one stock, there may be some middle ground. Instead of investing their entire $1,000 in a mutual fund, consider investing $500 – $700 in a mutual fund but let them pick one to three stocks to hold in the account. It may make sense to have them review those stock picks with your investment advisor for two reasons. One, you want them to have a good experience out of the gates and that investment advisor can provide them with their option of their stock picks. Second, the investment advisor can tell them more about the companies that they have selected to further engage them.
Don't forget the last step......
Download an app on their smartphone so they can track the investments that they selected. You may be surprise how often they check the performance of their stock holdings and how they begin to pay attention to news and articles applicable to the companies that they own.At that point you have engaged them and as they hopefully see their investment holdings appreciate in value they will become even more excited about saving money in their investment account and making their next stock pick. In addition, they also learn valuable investment lessons early on like when one of their stocks loses value. How do they decide whether to sell it or continue to hold it? It’s a great system that teaches them about investing, decision making, risk, and the value of compounding investment returns.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Avoid These 1099 “Employee” Pitfalls
As financial planners we are seeing more and more individuals, especially in the software development and technology space, hired by companies as “1099 employees”. “1099 employees” is an ironic statement because if a company is paying you via a 1099 technically you are not an “employee” you are a self-employed sub-contractor. It’s like having
As financial planners we are seeing more and more individuals, especially in the software development and technology space, hired by companies as “1099 employees”. “1099 employees” is an ironic statement because if a company is paying you via a 1099 technically you are not an “employee” you are a self-employed sub-contractor. It’s like having your own separate company and the company that you work for is your “client”.
There are advantages to the employer to pay you as a 1099 sub-contractor as opposed to a W2 employee. When you are a W2 employee they may have to provide you with health benefits, the company has to pay payroll taxes on your wages, there may be paid time off, you may qualify for unemployment benefits if you are fired, eligibility for retirement plans, they have to put you on payroll, pay works compensation insurance, and more. Basically companies have a lot of expenses associated with you being a W2 employee that does not show up in your paycheck.
To avoid all of these added expenses the employer may decide to pay you as a 1099 “employee”. Remember, if you are a 1099 employee you are “self-employed”. Here are the most common mistakes that we see new 1099 employees make:
Making estimated tax payments throughout the year
This is the most common error. When you are a W2 employee, it’s the responsibility of the employer to withhold federal and state income tax from your paycheck. When you are a 1099 sub-contractor, you are not an employee, so they do not withhold taxes from your compensation…………that is now YOUR RESPONSIBILITY. Most 1099 individuals have to make what is called “estimated tax payments” four times a year which are based on either your estimated income for the year or 110% of the previous year’s income. Best advice……..if 1099 income is new for you, setup a consultation with an accountant. They will walk you through tax withholding requirements, tax deductions, tax filing forms, etc. It’s very difficult to get everything right using Turbo Tax when you are a self-employed individual.
Tracking mileage and expenses throughout the year
Since you are self-employed you need to keep track of your expenses including mileage which can be used as deductions against your income when you file your tax return. Again, we recommend that you meet with a tax professional to determine what you do and do not need to track throughout the year.
The tax return is prepared incorrectly
No one wants a love letter from the IRS. Those letters usually come with taxes due, penalties, and a “guilty until proven innocent” approach. There may be additional “schedules” that you need to file with your tax return now that you are self-employed. The tax schedules detail your self-employment income, deductions, estimated tax payments, and other material items.
Important rule, do not cut corners by reducing the gross amount of your 1099 income. This is a big red flag that is easy for the IRS to catch. The company that issued the 1099 to you usually reports that 1099 payment to the IRS with your social security number or the Tax ID number of your self-employment entity. The IRS through an automated system can run your social security number or tax ID to cross check the 1099 payment and 1099 income to make sure it was reported.
Legal protection
As a 1099 sub-contractor, you have to consider the liability that could arise from the services that you are providing to your “client” (your employer). As a self-employed individual, the company that you “work for” could sue you for any number of reasons and if you are operating the business under your social security number (which most are) your personal assets could be at risk if a lawsuit arises. Advice, talk to an attorney that is knowledgeable in business law to discuss whether or not setting up a corporate entity makes sense for your self-employment income to better protect yourself.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
