In the previous section, I discussed the importance of living within your means, striving to make money with passive and portfolio income, as opposed to working for your money, and leveraging the benefits offered by point programs. Here, I’d like to discuss the importance of saving, investing, and starting when you’re young. Again, this is a key point the experts stressed on teaching our kids.
4) Start saving as soon as possible – Save for rainy days, save for your future. The experts agreed that younger folks tend to have a harder time to save because they believe they can wait until they are older before they have to save. This is wrong. We need to teach our kids now about the benefits of saving and the opportunities that exist with taking advantage of compounding. Compounding is the idea that when you save $X, the earnings on your contributions are reinvested to generate their own earning, which in turn is reinvested to earn more. This is also goes hand in hand with the idea of making your money work for you. An example shared is…if you invest $100 a month for 40 years, you’ll save $48,000. However, if it’s in a compounding account at 6% annual return, that $48,000 will in fact have grown substantially to $186,000. If you did this with $125 a month, that’ll result in $232,000 in 40 years. This is where millionaires are derived.
5) Set-up automatic transfers – Just like passive income, where income is earned via automation, automation for saving and paying expenses can be a lot of help. First, if you set up automatic transfers to save a certain percentage each month, you don’t have to think twice to whether you have to put that money aside. In fact, it won’t even be brought in front of you to entice you to spend it. Second, if you use auto pay to pay your debts, then you don’t have to worry about being late and accruing late charges, and you may even receive an incentive for setting-up auto-pay.
6) Save 15% of your income into a simple portfolio – This is the idea of leveraging portfolio income to create wealth. The goal is to save 15% of your income into a simple portfolio (i.e. 401(k), IRA, and/or a taxable account). William J. Bernstein, the author of “If You Can – How Millennials Can Get Rich Slowly,” suggests dividing the 15% into three equal amounts and investing those into 3 different mutual funds (a U.S. total stock market index fund, an international total stock market index fund, and a U.S. total bond market index fund). He explains that overtime the three will grow at different rates, but once a year you should adjust it so they’re equal again.
Expanding on the idea of saving a percentage of your income into a simple portfolio, it’s important to teach our kids what this means and get them started at a young age. Did you know a child under 18, as long as they’re working, they can have an IRA? Did you know they can invest into a brokerage account from the birth, even without a job, as long as it’s a custodial account? Did you know that if you’re self-employed you can still (and should) have a retirement account (either a Roth or Traditional IRA)?
Brokerage accounts such as Fidelity and Charles Schwab (this is not an ad) offers, for instance, Roth IRA accounts to minors if they’re earning an income. Generally speaking, although Roth IRAs for minors are for retirement saving, contributions can be taken out at any time without taxes or penalty. Minors who aren’t working can enter into a custodial account where the parent would manage it until the child reaches of age. Pending on the brokerage account, there may be no fees and no minimum to open the account (i.e. as with Fidelity and Charles Schwab). From here, pending on the brokerage, the IRA can allow you to choose from individual securities such as stocks, bonds, US Treasuries, certificate of deposits (CDs), exchange-traded funds (ETFs), mutual funds, and annuities, or a single fund option. You can get help of a robo-advisor and/or one of their financial experts to learn more.
There you have it! I know this probably is a lot of information, but I hope it sheds some light on the importance of learning for yourself and teaching your kids the value of living within your means, saving, leveraging the benefits of reward programs, and how to take advantage of the benefits associated with passive and portfolio income.
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