Want to teach your child about investing? It can be difficult to know where to start and even how to answer their questions. Hosts Michael MacKelvie and Valerie Escobar share their advice for parents looking to teach their child or teen about investing including, compounding interest, investment accounts, retirement plans and more.  

Transcript

Valerie Escobar: So, April is Financial Literacy Month, which is a big deal for us because Mike and I, we both love teaching everybody about finance. I think that this has been a great career for us because we get to share so much of our knowledge all the time. And today, we are focusing specifically on how to teach young kids and adults, or young adults, about investing in particular.

You’re listening to Your Life Simplified. I’m Valerie Escobar, a certified financial planner, and I’m joined by Mike MacKelvie, also a certified financial planner. Mike, how you doing today?

Mike MacKelvie: I’m doing good. How you doing, Valerie?

Valerie: I’m very happy today because it’s April, and we get to talk more about what we always talk about, which is money. Mike, what is your favorite thing—and I already know the answer to this, so you better get it right—what’s your favorite thing to teach kids when it comes to investing? The most basic principle.

Mike: Has to be the compound effect …

Valerie: That is correct.

Mike: … because it just gets so exciting, and the numbers get just crazy big when you’re dealing with young kids. Small changes in their habits, small changes in what they do with their money can just compound to just massive results. So, for me, it has definitely been illustrating that and kind of doing it in a fun way. A lot of this is how you approach it, and I think a lot of times we maybe assume that kids or just people in general can wrap their heads around just how powerful the compound effect can be. But my experience just in the classroom is kids will underestimate what their money will grow to over, let’s just say 30, 40 years about magnitudes of 10X. They might guess that $40,000 will grow to $400,000 versus $4 million. And when you get a chance to just see the eyeballs and kids tuning in, get that real-time feedback in a world craving more attention, I think is an example of just how powerful it is that in that moment everything else gets tuned out and it’s like, “Wait, how does it go to that much?”

So that’s been my favorite experience as far as teaching kids, and I think probably the most powerful tool that a teenager or just a young adult can learn about.

Valerie: Absolutely. And I think with the compounding effect, it is very much exponential. And so that means you need to start at the beginning, which is very unrewarding when you have a shortsighted as to it. So it’s like, “Great, I invested my $5 of allowance, and now it’s going to grow to $10 in 10 years.” That’s really exciting. But once you start to see that grow in compound, you start to see that you get real returns, and time is always our most powerful tool, trying to pick the best stock and hope that it’s that shooting star. That’s really not the key to success in a financial plan, but just sticking to the plan, which, I think, is another valuable part of it as well, is having a plan and sticking to it. And I think, especially as investors, and I don’t know if you’ve noticed this even with adults, that sticking with the plan, what’s the value in that?

Mike: Well, we tend to overestimate what we can do in short periods of time and underestimate what can happen over a little longer. We might get super upset going off that planning piece there if we don’t see the immediate results within a week or even a few weeks or even a few days, and then we can look back and, just six months a year down the road, we can kind of be blown away sometimes at how much progress we can make if we just stick with something. So, I mean, yeah, it’s a constant give and take, but yeah, there’s certainly a psychological barrier there, right?

Valerie: Absolutely. And with that, we also incorporate the timing or not timing the markets. I have an 11-year-old, and I was talking to him about how he has this little app to invest his allowance that he earns, and in there he was first starting out with just picking individual stocks, a video game stock or, I think it was an airline stock, I don’t know, whatever he picked within the next two days, invariably, there was red on his app, and he was all upset, and I worked really hard to tell him the same thing I tell clients,  that we can’t look at it every day, that it’s just going to make you emotional and upset, and you’re going to want to bail and sell low. So, we did start to… We focused a little bit more on what diversification means and using exchange-traded funds, but more than anything, it was just always driving home the point that we need to not try and time the market because just bread today doesn’t necessarily mean bread tomorrow, and we just need to be invested for the long term.

Mike: Yeah, I mean, it’s kind of a metaphor for life. You’re sacrificial either way. The good thing is you get to kind of choose what it is that you give up. You get to choose what your sacrifices are, and whether it’s setting a little bit of money aside or going to the gym to work out or just working a little bit harder on homework, it’s like, “Okay, that’s a sacrifice for today in some form, typically.” And the idea of it is, it’s a smaller sacrifice than the future one you might have to pay in some form, missing out on something or not being able to be the person you want to be. So, I think it’s investing that metaphor is very easy to tie in because it really is the same thing. It’s no different. Right?

Valerie: Absolutely. Yeah. And I think one of my favorite, and I think it’s yours as well. I’m acting like I know everything about what you like, but I think Roth IRAs are something I really enjoy, especially for young kids, young adults, really. Do you want to chat a little bit about that? What’s the importance and why they would be so valuable?

Mike: Yeah, the actual mechanics, right? This question actually came up today, perfect timing. I had a father asking about his three boys, how he should get them started, and there’s obviously that behavioral part that we just touched on there, which is the biggest barrier. But once you get into the mechanics, some great starting points, very familiar for a lot of people just getting going with a Roth IRA, doesn’t matter how big it’s, even if it’s 20, 25 bucks a month that you’re putting in there, some habitual contribution that you’re placing into this account. Obviously, the benefit there, if you’re paying taxes, talking about young adults, they’re probably not making significant incomes to where they’re in super high tax brackets, so, paying taxes now is a heck of a lot better than paying it down the road.

General savings account beyond that in a debit card. That’s how I started. It’s kind of how I got familiarized with the banking world. It was like, “Hey, I got this digital card. It’s linked up to the savings account that I can go deposit cash in.” My first couple summer jobs, moving company eventually worked for PF Chang’s. I was slinging lettuce wraps during the months of June through August in Portland area, if you ever came by.

Valerie: I missed you. I was not there.

Mike: Yeah. Well, that’s unfortunate.

Valerie: But I’m glad you were saving at that time.

Mike: But having that savings account and just kind of seeing that and seeing that debit card linked to it, right? There’s kind of that feeling of seeing that growing for you. And then eventually, “Oh, I remember going to my parents for this,” and they said, “Go get a CD.” And I was like, “Well, how much do you get from a return standpoint with a CD?” And this was like 2007, probably. They said, “Well, 1% or 2%.” I was like, “Why would I want to do that?”

Valerie: Right.

Mike: So, sometimes, growing up, you probably can relate to this, too, is you go to your parents, and they might not have that answer. And part of growing up is coming to the realization that your parents might not have the perfect answer for these types of things, whether it’s your homework or something like this. That was the initial advice I got. Eventually, I found a Roth IRA and started that, and it’s been cool to see what that’s grown to just over 10 years. But those two pieces, I think, are kind of a good starting point for a savings account, getting that going, and then just having an automatic contribution into a Roth for all the tax benefits.

Valerie: Absolutely. And I think as young adults start getting into the workforce, they’ll find that there’s a 401(k) available or 403(b), depending on if maybe they’re in education or hospitals. There’s different types of retirement plans. But one thing that they will see is that the company will generally match. So that’s what we would consider free money. And so, if your company matches 5%, it’s 5% of your paycheck that’s “free” put into the retirement plan for long term. So, I always want to teach young adults to make sure that they’re using that, but also, even if there is no contribution or no match from the employer, you’re still only hurting yourself if you’re not putting money in there. And I think the habit of starting to save with the goal of eventually maxing out how much you can save to that 401(k) needs to start early. Like everything else we’ve really harped on tonight, start early, keep at it, stick to the plan. And that’s a really, I think, good way to also help your kids understand.

Your kids, I mean, I don’t know, I think 20-year-olds are still kids sometimes, but your young adults to invest, and because a 401(k) will generally have a smaller number of investments to choose from, and so it’s less intimidating and overwhelming to just really look at that list and get an understanding as to what it is that you should pick.

Mike: Definitely. I think we’d be remiss not to mention that large unfortunate decision a lot of kids make and families and the amount of debt that they maybe take on for a college degree and whether or not that college degree pencils out on the other side. I’ve dealt with so many families and kids just through our college program, where they’ll be taking on six figures of debt, and they have no clue what the monthly payment will be on the other side or how even the repayments work. It’s not difficult to go find these loans. It’s not difficult to qualify, Parent PLUS loans, for example, you pretty much just have to have a pulse, and you could take out just about as much as you want. And that’s unfortunate because there maybe isn’t the due diligence to look into, “Okay, is this really worth it?” And sometimes that’s met with, “Well, you can’t put a price on education, he or she just felt the best at this college, and we want to support them.”

And it kind of gets camouflaged into this just horrific financial decision. And the sad thing about financial decisions like that is we think of them as purely financial, like, “Well, that’s just money. And there’s other personal things that are more important.” The financial can become very personal very quickly. You can’t, for example, buy a home for 10 years. That’s maybe a personal setback of sorts. You can’t maybe start the business that you wanted because $1,500 a month is going to a student loan obligation. So, I think the lens in looking at college truly is not, “Hey, just because this feels right, it’s advisable.” I mean, we wouldn’t have that thought process with anything else. So, not mentioning all of this as far as managing money and the youth, I think would be an error on our part because so many kids and families get set back with the first major decision being taking out a bunch of debt to pursue some degree that maybe isn’t worthwhile.

Valerie: And I would go back to that first point where you said that some people think, “Well, you can’t put a price on education.” I think we kind of can. If we look at a return on investment …

Mike: I guess we did.

Valerie: … how much am I paying for tuition?

Mike: Yeah.

Valerie: Yeah.

Mike: It’s not free.

Valerie: Yeah. Exactly.

Mike: So, they’ve done that. But yeah, I mean, I could go deeply into that. Unfortunately, there’s a ton of societal pressure on what you think of … being worried about what the other person might think of where you’re going to college forces that financial decision. And that pressure gets put on parents, too. I think parents want their kid to go to a great university, so they feel just as good saying it in conversation as much as the kids sometimes, which is unfortunate.

Valerie: Sure.

Mike: So, I think going about that a little bit more rationally and not just so feelings based, because there’s no pain with that financial decision when you take out a bunch of debt at the current moment, it’s easy to do, is a major setback that kids should certainly be wary of.

Valerie: Absolutely. And so, I think maybe at least the last idea I had for this segment is in teaching kids and young adults about investing are just really plain old brokerage accounts. That’s a really simple way to start. You don’t necessarily have to have a job. With a 401(k) or Roth, you do need to be working and having income. So, with a brokerage account, the taxes are different, right? You’re getting taxed along the way, but they are more accessible funds as well. And so, that is another basic concept is just understanding, “Okay, retirement funds are for the long term, brokerage accounts are taxed differently, a little bit more friendly for shorter-term uses.” And I mean, in the end, I think that’s really what it is that helps us become financially strong and grow is to be able to put your money to work, having somebody else’s work basically allow us to grow our money as opposed to ourselves getting a job and hiding all of our cash in the mattress.

Mike: Exactly. I think all those are great points and just getting familiar, too, with it all. So, yeah.

Valerie: Awesome. Well, thank you all for joining us today. Be sure to ‘Like’ or ‘Subscribe’ or ‘Follow’ wherever you are tuning in, and we will catch you next time.

Mike: Thank you.

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