Make Your Kid a Millionaire
By: Kevin McKinley
There are 4 reasons I review these financial books on our blog:
1) For me. Reviewing the material after I’ve read it helps solidify my learningI was hesitant about reading this book because the subtitle reads: “11 Easy Ways Anyone Can Secure a Child’s Financial Future.” If making our kids millionaires were easy, everyone would be millionaires. Whenever I hear easy and financial planning, alarms sound in my head for potential schemes. I was pleasantly surprised that while the easy portion is misleading, the ideas are sound and are certainly feasible for many people.
2) For the future. We can’t use every tip right away, but I know we will want to use them eventually
3) For convenience. Since I check all of these books out from the library, it is nice to have a quick way to reference them without going back to the library and being put on a waiting list
4) For you. There may be a small number wondering about this topic, but you don’t want to read the whole book to decide if it’s the right one (oh how I would have loved to read a review on the Tightwad Twins before losing those 191 pages of my life). I use other blogs to gauge whether or not particular personal finance books are for me, so I’d like to pass that on if anyone else is interested.
Get started NOW. The earlier you start saving money, the more time will work on your side and make him/her a millionaire. And here’s how to do it.
1) McKinley puts his money where his mouth is. This is not theoretical at all. He gives sound investment advice if you are looking for specific places to put your money. McKinley goes through the advantages and disadvantages for 529 plans, mutual funds, treasury bonds, Roth IRAs, etc., etc., etc.
2) Broken into appropriate sections, depending on how much time you have to save for your child
1) I personally feel it doesn’t adequately address the importance of taking care of other financial obligations first. Our kids are important, yes, but taking care of those credit cards are pretty important too.
2) Not a good resource to teach your kids about money while they’re becoming millionaires
INTRODUCTION. Ten Things You Need to Know
1. Time is your best friend
2. Procrastination is your worst enemy
3. Without a foundation, the structure crumbles (read: teaching your kids how to handle their money; how to do this wasn’t the premise of this book, so if that’s what you want, you’ll need to look elsewhere)
4. Watched pots never boil, and watched stocks never double
5. Wealth Equals Freedom
6. We are who we are, not what we have
7. Money is a tool, not a weapon
8. The second-greatest gift (love is the first, financial independence is the second)
9. It’s easier to spend less than it is to make more
10. People get rich slowly
McKinley also included a list of priorities for families with small children:
1. Wills, guardians, and life insurance
2. Save for college
3. Systematic deposits into a mutual fund
4. Deposit into your Roth IRA
Biggest Bang for your buck.
1. Save for college
2. Your kid’s Roth IRA
3. Deposit into a variable annuity
4. Grandparents help
5. Your Roth IRA
6. Start your kid early in his 401(k)
PART ONE: Prebirth to Six Years.
Topics: Mutual funds, college savings plans, wills, life insurance, trusts
• Prospectus: tells you about the fund’s past performance, expenses, sales charges, and any other disclosures required by law. You can get this in the mail or download it from their site
• What to look for:
• Keeping your expenses low can save you hundreds of thousands of dollars in the long run—do your research about fees
o A long history of operation
o Continuity of management
o Recognizable, “blue-chip” companies in the portfolio
• To avoid tax-heavy distributions:
• Make systematic deposits—this will ensure you buy less when they are expensive and more when they are inexpensive
o Look for funds with low tax liabilities and portfolio turnover
o Choose a tax-advantaged mutual fund
• Remember that unless it is a retirement account, the distributions are taxable the same year
• Advantages: low initial deposit, diversification, systematic deposit program, the power of dollar-cost averaging, easy additions and withdrawals
• Disadvantages: Possible to lose money and pay taxes (uncommon, but still happens), you only know exactly what you are invested in two days out of the year, filing taxes
How to get started in mutual funds
1. Pick a fund: for more information and tools:
2. Title the account
a. American Association of Individual Investors
b. Consumer Reports
g. Smart Money
a. In your name if you aren’t worried about taxes3. Establish a systematic investment plan
b. In your child’s name if you’re not worried they will take it over when they reach adulthood for purposes of which you don’t approve
Wills. Check. We did not hire an attorney, but probably will when our assets are a little more complicated. In Texas, it is legal to do one on your own. We used uslegalforms.com. For $29, you get documents to create a last will and testament, living will, and durable power of attorney. For $45 you get the documents for the spouse as well.
Life Insurance. Check. But you can go here and here and here and here to compare quotes with the ones you received from your agent
Establish a Trust.
• Allows for gradual release of the money
• Choose a trustee that is not the guardian
• Address these common issues:
o 1) maintenance (monthly payment to offset cost of raising your child)
o 2) health care (authorizing to spend what they need on child’s health)
o 3) education (college, private elementary and secondary school)
Admittedly, for the next three sections, I paid less attention because I know I’ll be rereading information on this in 6 years when Jonas is older.
PART TWO: Ages Seven through Twelve
In addition to talking about college savings, McKinley focuses on getting your child ready for retirement as well. This option never crossed my mind before (probably because we’re still working on our own retirement)
Topics: Annuities, Roth IRAs, Common Stocks,
Copyright © iStockphoto/ YinYang
• Advantages: no taxes and no loss of control, no mandatory distribution
• Disadvantages: no tax deduction, the money is tied up
Combining a Roth IRA with a trust
• Advantages: generate tax-free growth for decades, prevent immature heirs from squandering wealth
• Disadvantages: Congress may eventually disallow this since it is an effective way to legally avoid taxes, there are additional expenses with this additional layer of protection between your child and their money
• Advantages: low initial investment, low taxes, low commission expenses, natural patch to teaching child about business, money, and investing
• Disadvantages: poor planning tool, possible bookkeeping nightmare, timing of the trade, commission costs, using DRIPs (dividend reinvestment programs) with growth companies
• How people don’t accumulate wealth:
• Getting started:
o Buy obscure penny stocks in some kind of mining or technology stock—yes, they really can go lower
o Buy when you can’t afford to put that money aside
o Buy based on rumors and short-term news stories
o Worry about stock’s day-to-day fluctuations
o Get upset when another stock has risen more than yours
o Sell if stock goes up right after purchase
o Sell if stock goes down right after purchase
o Buy what you know
o Open your eyes: look around the community, do friends work for thriving businesses, etc.
o Analyst recommendations (but remember that they analyze short-term fluctuations)
o Buy what your child knows
o Don’t sell your stock
o DIY research: pretend you are buying the whole company. You can get this information at valueline.com or using the Value Line Reports at the library for free.
You can also go to www.sec.gov and search the EDGAR database if you want more information. When you get the info, pay attention to:
• Sales: Are they going up or down?
• Earnings: Is the company making more profit each year? Can they keep it going into the future?
• Debt: Too much (when compared to other companies in the industry) can be a red flag
• Dividends: Does the company pay an annual dividend? Has it paid a dividend every year? Has it raised the dividend every year?
PART THREE: Ages Thirteen through Twenty-One
Topics: zero coupon bonds, zero coupon treasuries, Roth IRA in your child’s name (and how to make “legitimate” income), encouraging your child to contribute to their 401(k)
These last two topics are pretty interesting, but since they affect my parents (and not us for a number of years), I’ll just record the topics and if you are interested, you can pick up the book on your own.
PART FOUR: Into Adulthood
Topics: helping your child purchase a home (with and without money), tools to cut estate taxes
PART FIVE: Extra Stuff
Topics: protecting your child’s wealth from your child, make your grandchild a millionaire