Tuesday, February 13, 2018

Pop Up A Family 401(k) In Five Easy Steps

Pop Up A Family 401(k) In Five Easy Steps

Chris loves personal finance. Of course he does. He’s an accountant.

But he hates all the complexity and technical jargon that prevents “normal” people from taking action.

For example:

I’d like to see every eligible W2 earner make a non-tax deductible contribution in the amount that is the lesser of one’s taxable earned compensation (not adjusted gross income) and the allowable limit set by the IRS as dictated by age and subject to certain modified adjusted gross income limits into a Roth individual retirement account established by the Taxpayer Relief Act of 1997 in the first allowable year and every allowable year thereafter to grow tax-free in a passive, low cost, broad market index fund until age 59.5.

What the...?

That’s exactly the kind of techno-jargon Chris laments. He’d prefer to present personal finance topics simply and briefly. That’s why he created the short-form podcast Popcorn Finance.

So, what I meant to say was:

I want all parents to set up Family 401(k)s for their working teens. Pronto.

Why? It will save their financial lives.

What’s a Family 401(k)?

Grab a bag of popcorn, kick back, and fire up episode 43 of Popcorn Finance.

Chris and I break down the Family 401(k) into 5 easy steps. Listen and you’ll learn my favorite family finance tip in the time it takes you to make — and perhaps eat — a bag of popcorn.

Here’s the cheat sheet:

  1. Get a job. Like a corporate 401(k) deal, the Family 401(k) starts with work. In our family, I insist on a summer or part-time job that issues an official W-2. That way, I know we’ll be in the clear with the IRS.
  2. Open a Roth IRA. Help your working teen open up a Roth IRA account at a reputable broker. I chose Schwab. For teens under 18, you can set up a custodial account.
  3. “Family-source” contributions. So your teen spent the earnings on gaming and pizza already? Time to hit up the grandparents and rich uncle Phil for some cash to contribute to the Roth. See if your teen can "family-source" enough funds to max out the contribution.
  4. Invest. Don’t let the funds wallow in cash. I like a low cost all-market index fund like VTI for the long term win. Don’t try to time the market either. You can’t.
  5. Rinse and repeat. Keep doing this every year whenever eligible. Congratulations, now your teen knows the wisdom of dollar cost averaging. Oooh, fancy jargon!

After decades in the market with steady contributions enjoying tax-free growth, your teen’s gonna be sitting pretty on a sweet retirement stash come age 59 and a half.

Which brings us to Chris’ bonus step: Step 6. It’s the ultimate parental payback. It’s like the butter on the popcorn.

Listen here to find out what it is. It’s only 10 minutes long. Pop. Pop. Pop.

Want to turn these tips into action? Check out FamZoo.com.

Friday, December 29, 2017

Try a Top Ten Family Finance Tip With Your Kids

Resolve to teach your kids personal finance skills in the New Year!

Not sure where to start? Pick a few tips from this top-ten list.

My 10 most viewed family finance tips from the last 12 months are:

10. Offer Kids A Savings Match With Strings Attached

Encourage your kid to save by offering a matching contribution, but attach some of these strings to send the right message.

9. Pre-Negotiate Your Teen’s Summer Paycheck Savings Split

Agree on this summer paycheck strategy to teach your teen the Warren Buffett saving rule. Instill a smart payroll deduction habit early.

8. Review 529 Statements With Your Teen Every Quarter

Here are 6 valuable lessons your teen can learn from 529 statements if you’re willing to make a 15 minute investment every 3 months. See if you’re up for the challenge.

7. Motivate Kids To Maintain Value With A Trade-In Deal

Don’t want your kids being cavalier about their possessions? Try this trade-in value trick.

6. Replace Chore Charts With Money Requests

Help your kid get from dog-eat-dog to top dog in tomorrow’s work world with this proactive alternative to chore charts and allowance.

5. Fully Fund Your Working Teen’s Roth IRA

Here’s why it makes sense to max out your working teen’s Roth IRA, even if they already blew through all their paychecks.

4. Clean Up Your Kid’s Spotty Bill Payment Record

Can your kid handle making consistent monthly payments for an online subscription like Spotify? FamZoo data says many can’t. Here’s why it’s time to make your kid face the music.

3. Post Wants On The Fridge To Chill Your Child’s Spending

Here’s a clever parenting trick for putting a chill on impulse spending by kids.

2. Show Teens The Top Of the Stock Market

Try this fun visual prop for teaching your teen some important investing wisdom: timing the stock market is a fool’s errand.

1. Show Kids What The S&P 500 Looks Like

Kids hear about stock indexes in the headlines all the time — the Dow is down, the S&P is up, the NASDAQ is flat. But do they have any idea what an index is? Here’s an easy, fun way to show them the what and why.

See any that fit your family?

Pick even just one, and you’ll have a quick victory to claim on your New Year’s resolutions. Better yet, you’ll make a lasting impact on your child’s financial future.

Happy New Year!

Want to turn these tips into action? Check out FamZoo.com.

Friday, December 8, 2017

Use Parental Money Controls for Transparency Training Not Micro-Management

Money Helicopter

Parental controls are all the rage when it comes to prepaid card apps built for kids and teens.

Sounds like a helicopter parent’s dream.

Back in the day, my mom had no clue about half the things I bought with untraceable cash as a kid. Phew.

Sure, close monitoring certainly makes sense when kids are young.

But teens? They crave autonomy and privacy.

Don’t shared parental controls undermine both? Aren’t they just another invasive instrument of today’s high tech helicopter parents?

It sounds like ditching the controls when kids become teens makes sense too.

Despite being a fan of giving teens plenty of leash, I have a different view.

Parental controls help your teen develop financial transparency — if used properly.

Why is that important? Teens who become comfortable discussing transactions with parents now are more likely to evolve into adults who are comfortable discussing finances openly with a spouse or partner in the future. That’s a good thing. Financial transparency in a relationship reduces conflict and aligns everyday money habits with shared goals.

That said, kids who strongly resent parental controls will evolve in the opposite direction. They’ll become more secretive about money, not less.

So how do parents use parental controls to build comfort instead of resentment?

  • Don’t make it a surprise. Before you roll out the prepaid card app, make sure the kids clearly understand the visibility you’ll have. Give them a tour of all the parental control capabilities. Make transparency part of the deal up front: “You get access to money, I get visibility on your spending — fair enough?” Yep.
  • Don’t make a fuss. Mistakes will happen. That’s how they learn. Set the precedent early that the inevitable money mishaps elicit calm, rational discussions instead of raging reprimands.
  • Don’t react to everything. Let the little things slide. Bite your tongue when the stakes are low. Nagging is a surefire way to stoke teen resentment.
  • Don’t always be first to comment. Let your kid broach the topic when mistakes happen. She knows you already know. When your kid gets comfortable mentioning mistakes first, you’ll know you’re getting it right.

So, ditch the helicoptering, but keep the parental controls at a reasonable altitude. Help your teen practice gaining comfort with financial transparency. A future spouse or partner will thank you someday.

Want to turn these tips into action? Check out FamZoo.com.

Saturday, November 11, 2017

Make a Money In 'N Out Spreadsheet With Your Teen

Teen With Money In N Out Pie Charts

For many kids, money can be a bit too easy come, easy go — especially in today’s digital world.

But tracking and categorizing money thoughtfully will always be a key life skill. Dollars deserve a purpose whether digital or not. So how do we get our kids to be more mindful of money as it ebbs and flows?

Build a Money In ’N Out Spreadsheet with your child. It’s a simple tool for pinpointing the sources for money coming in and the purposes for money going out.

Here’s a recipe I used with my son in college:

  1. Import last month’s transactions. Most prepaid cards or bank cards have a way to export transactions, so this step is often just a quick cut and paste. If your teen uses cash, then have her manually enter every transaction in the spreadsheet for the current month.
  2. Add “Money In” columns. Sit down together and figure out the main types of income. Create columns for each. In our case, money coming in was either:
  3. Add “Money Out” columns. For money coming out, let you child suggest the key categories of spending as you browse the transactions together. Less is more here, so steer it toward high level groupings. We ended up with:
    • eating out,
    • eating in,
    • health,
    • gaming, and
    • phone.
    The right categories will depend upon what your child is responsible for purchasing directly. If your teen has very few transactions, that’s probably a sign you need to relinquish more purchasing responsibility. Either create some appropriate budget-based allowances or use a reimbursement strategy, or both.
  4. Copy the transaction amount into the right in or out column. For each transaction row, copy the amount into the appropriate income or spending column. In rare cases, you may need to split the amount between spending columns. But if you’re doing that a lot, your categories are probably too granular. Keep it simple — like the In-N-Out menu.
  5. Sum up the totals. Add a final row that sums up the amount column, the income columns, and the spending columns. The sum of the amount column will indicate the net change for the month. If it’s negative, more was spent than earned during the period.
  6. Make in ’n out pie charts. Create an “in” pie chart for the income totals, and an “out” pie chart for the spending totals. Any surprises?

  7. Have a non-judgmental discussion. Here’s where you want to be long on listening and short on lecturing. Let your child make the observations. Offer constructive alternatives, like maybe a parent bounty for taking a bag lunch instead of eating out.

I created a Money In N Out spreadsheet template in Google Docs that you can copy and adjust to your liking. Check it out here.

Try the exercise with your teen, and see if it takes the money coming and going in a more mindful direction.

Want to turn these tips into action? Check out FamZoo.com.

Thursday, November 2, 2017

Plot Your Longest Market Losing Streak Since High School

Boy making loser hand gesture.

My longest market losing streak since high school is pretty epic.

If I had invested $5,000 in the S&P 500 on January 1, 2000, it would have been worth less than that for 12 years in a row. Ouch.

But, as Tom Petty said, “Even the losers get lucky sometimes.” Especially if they wait long enough in the market. By October 2017, that original $5,000 investment would have turned into $8,976.49. Not too shabby!

But, remember, Tom also said, “The waiting is the hardest part.

Here’s a simple spreadsheet exercise you can use to convince your teens (or your spouse or even yourself) to invest patiently in the market — even when the going gets tough.

Plot your hypothetical market winning and losing streaks dating all the way back to high school.

My spreadsheet shows what would happen to an investment in the S&P 500 from a given year til now for every year since my freshman year in high school. That was 1976 in case you were wondering.

This is one of those rare times where the older you are, the better it gets. So, if you’re a young parent, you may want to use grandpa or grandma as a reference point instead.

Here’s how to make a spreadsheet like mine in Google Docs:

  1. Find a source of historical S&P 500 data. I found mine here at multpl.com.
  2. Add a price column for every year since the beginning of high school. Pro tip: I was able to do this very quickly by copying the data table entries on multpl.com from the top down to the 1976 entry, pasting them vertically into a temporary sheet, sorting the data by date descending, selecting the sorted data, creating a new sheet, and using Edit > Paste Special > Paste Transposed to lay out the data horizontally across the sheet. Beats the heck out of typing!
  3. Define an annual contribution. Insert a couple rows up at the top, enter an amount for your fixed annual contribution size, and use Data > Named Ranges... to assign the amount to a name (like “contrib”). Then you can use that name in your formulas.
  4. Enter rows representing the investment performance for each year. Find the column for the starting year, and enter the initial contribution amount as the formula “=contrib”.

    Fill out the remaining columns with the formula that calculates the value of the investment a year later by using the historical price data up above. My price data is in row 4, so the formula for the first anniversary of my initial investment in cell B5 looks like: “=A5+((B$4-A$4)/A$4)*A5”.

    The cool thing is I can now just select that cell along with all the cells to its right and type Control-r to copy the formula across the row. Now I’ll see the value of the initial investment each year from inception to present day.

    I repeat this for each successive row starting one column over to the right each time until I get to the current year. At the end, it looks like an upside down ramp.

  5. Add conditional formatting to call out winning and losing years. A winning year is when the current cell’s value is greater than the initial contribution. Make those cells green. Otherwise, make the cell red to mark a losing year. You can create the conditional formatting rules from the Format > Conditional formatting... menu entry.
  6. Add running totals across the bottom. Summing the rows for each column will give the total value of all investments for each year across the bottom. I like to compare that with what would happen if I had just kept the contributions in cash the whole time.

Check out my win/loss plot.

Step back and admire all that green. It dominates. And, at the moment, there isn’t a single row that hasn’t turned green ultimately.

At the bottom right, compare the total ending value of the investments versus just stashing the same contribution in cash year after year. In my case: $1,719,627.25 vs $210,000.00.


By the way, I’m ignoring dividends and expenses to keep things simple. With or without them, the point remains loud and clear: Dollar cost averaging plus low cost index funds for the win!

Despite an occasional epic losing streak, your simple market win/loss spreadsheet will prove to your kids that patient, consistent investing kicks cash’s backside over the long run.

All the more reason to start your teen’s Family 401(k) asap!

Want to turn these tips into action? Check out FamZoo.com.

Friday, October 20, 2017

Show Teens The Top Of the Stock Market

An elusive mountain summit.

The stock market can be a mighty dry topic for teens. That’s a shame, because jumping in early is a huge advantage.

So, you’ll need a compelling hook to capture attention and make your key points stick. Points like: don’t miss out by trying to time the market.

Try this clever teaching prop. It’s a picture of the history of the “top” of the market. It’s a classic I see floating around the Internet periodically in one form or another.

Visual. Amusing. Instructive. A teen teaching trifecta!

This picture makes it pretty darn clear that nobody knows for sure when the top of the market will come.

And even if this is the top of the market now, the odds are pretty darn good it won’t be down the road. Like decades from now when your teenager is 59 and a half.

You know, the age your teen will start selling off those index funds in that killer Roth IRA you set up.

Wait, what? You’ve been holding off on plunking your teen’s Roth contributions into an index fund? Well, it would be dumb to start Junior off at the top of the market, right?

Study that picture again.

Whether the market is at the top, the bottom, or somewhere in between, just jump in. And keep jumping in every year.

Want to turn these tips into action? Check out FamZoo.com.

Thursday, October 12, 2017

Get Real Family Finance Tips From These Five Finalists

Tired of reading the same old puff pieces on kids and money in the mainstream media? Instead of boring platitudes from “experts” (some of whom haven’t even raised kids!), how about some real insights from real parents in the new media trenches?

Start with these five Family Finance finalists for this year’s Plutus Awards for independent financial publishers. I’ve picked a representative post or podcast from each to help you dive in:

  1. Chief Mom Officer: Cell Phone For Kids — Why My Kids Don’t Have One (And a Tell-All Interview).

    Does your kid need a cell phone? Would you cover its cost? Most parents answer “yes” and “yes” — especially by the time a kid is 12. Not Chief Mom Officer. She and her kids (10 and 14) challenge the new normal. Find out why going against the grain might make sense in your family too. Whether you agree or not, there’s plenty of good food for thought here.

  2. Montana Money Adventures: 3 by 3: Minimalism with Kids.

    Ms. Montana describes a clever toy rotation scheme for encouraging moderation in younger kids. The year long experiment has helped her kids derive more joy from less, lengthen their attention spans, increase creativity, decrease fighting, and reduce clutter. They’ve become mini minimalists. Sound like magic? See how she did it.

  3. Mama Fish Saves: Why Tough Summer Jobs Beat Summer School For Teens.

    After reading this, you’ll want to ship your kids off to a tobacco farm instead of summer school. Well, maybe. Chelsea shares five important life lessons she learned working long, tough hours during the summer. Every kid could benefit from a session at the School of Hard Knocks. See why you might want to enroll your teen next summer.

  4. Couple Money: 4 Ways Parents Can Teach Their Kids About Money.

    Elle hosts one of the few podcasts squarely focused on family finances. Her episode with yours truly is a good place to start your binge listening streak. Naturally, we discuss teaching kids good money habits. Listen in as we share our favorite systems, tips, and stories.

  5. Catherine Alford: Reflections on 7 Years of Blogging & Turning 30!

    Wrangling kids. Agonizing between building out a risky but flexible home-based side hustle versus returning to the steady but inflexible 9 to 5. Holding down the home fort while your partner slogs through long hours at a demanding workplace. Wrestling with health issues. Balancing it all through midlife can be pretty overwhelming. Impersonal self-help platitudes from main stream media aren’t worth much. Real stories from real people like Cat might just be the gold you’re looking for. Plus, you can actually talk to her in the comments. Bonus.

So, if you really want to learn more about family finance, skip the mainstream puff and pick the independent plums. More educational. Less boring.

Want to turn these tips into action? Check out FamZoo.com.