What I Would Do With Biden’s $3,000-per-child Benefit
Lifestyle creep is a common stumbling block to financial independence and personal wealth building. Lifestyle creep happens when your income increases but you lack the discipline to curb your spending. Every time your income increases you give yourself permission to spend more money. One of the best ways to stop lifestyle creep is setting up an automatic withdrawal from your paycheck into your savings or investment accounts.
This week Democrats proposed a monthly child benefit payout to families. If passed, this payout has the potential to be a considerable income increase to many families, and we could witness a group lifestyle creep. Another great way to avoid lifestyle creep, is to plan ahead how best to manage new income, so let’s look at two scenarios for what to do with the money.
The first example is what I would do with the benefit, because I have no debt. However, I’ll add a second example of what I would do if I had debt.
With Biden’s $3,000-per-child annual benefit I would save all of it — or as much of it I possibly could until I reached $3,000-per-child. My aim would be to save the $3,000 as fast as possible. Within the first year would be ideal. That not being possible, I would do everything in my power not to go over the 24 month mark with the mentality that this was money I didn’t have before. The $3,000 would be paid out $250 a month making it a lot easier to spend it versus receiving it as a lump sum.
Once I saved $3,000 I would reassess my family’s needs and save a portion of the benefit monthly. It would probably look something like this. Once I saved the $3,000 per child I would immediately open a Vanguard investment account for each child.
Let’s imagine you have a 6.5 years old child at the start of the $3,000-per-child benefit and it takes you 18 months to save $3,000. The child would be 8 years of age when you can start investing with Vanguard.
If you open an investment account with $3,000 and you start investing $50 a month, you would be left with $200 a month for the child’s basic needs and education. In this scenario, when they are 18 years of age you would have invested $3,000 plus a total of $6,000 over the 10 years. However in that decade, thanks to compounding interest and assuming an average growth of 7%, your $9,000 investment would possibly have grown to $14,450, with a total interest earned of $5,450.
If you start with $3,000 and you invest $100 a month, you’d be left with $150 a month for the child’s needs and education, and when they are 18 years of age you would have invested $3,000 plus a total of $12,000 over the 10 years. However in that decade, thanks to compounding interest and assuming an average growth of 7%, your $15,000 investment would possibly have grown to $23,000, with a total interest earned of $8,000.
You can see the account options in the summary comparison chart in the Vanguards website. I’m partial to the UGMA/UTMA account or the General Investment account because I’m not sure anyone knows if colleges will be relevant in a decade.
Compounding interest is so amazing that, if your child lives their life without touching that money they would be halfway to having enough to retire! This would require they would live their life earning and spending carefully and reasonably, just the way we are trying to, but by the time they are 65 years old that account could have potentially grown to be $384,000 in the first and $550,000 in the second example.
I have an article that explains with simple numbers how much you need to save to have a comfortable retirement.
What if I have debt, you ask?
With Biden’s $3,000-per-child benefit, and having debt I would follow these steps. First, critically assess how to stop accumulating more debt. Knowing you have ongoing income might help you decrease some of your expenses. For example, if you stop the cycle of payday loans. Second, I would assess how much of the benefit I would need to improve my family’s quality of life, for example increase spend on food and utilities. Everyone is able to think more critically if they have their basic needs met. With whatever is left, I would pay debt.
Which debt to pay first is really personal. Mathematically inclined people, like me, prefer to pay debt from the highest to the lowest interest debt, but there’s some psychology behind the idea that…
“completing the parts from smallest size to largest size can help people realize quick motivational gains that increase their likelihood of completing the task.”
People that need the motivation to stay on course to pay debt should make a plan to pay from the smallest debt to the largest so they feel they are accomplishing things as they go along.
The next step would be to save the $3,000 and the step after that would be to open a Vanguard investment account. I wouldn’t open a custodial account to start with though. This means I wouldn’t follow the plan I laid before — the plan I would follow if I didn’t have debt. If you have been in a financially hard place, you probably have no retirement investments. I would look at those instead.
America is turning into a multi-generational household country and the burden of caring for parents and children is falling on those currently in the workforce. Some of that is a result of changes to pension plans in the ’80s. Pension plans used to be funded by the employer but that changed and now, most employees are responsible for self funding into using 401(k) plans. When this change happened many employees saw their incomes increase but never diverted that extra income to their self funded pensions and were left without pensions and never started saving for retirement. Another example of lifestyle creep.
You have been struggling without this money so why not continue struggling but have a more dignified retirement?
If you save $100 a month from when your child is 8 to 18 years of age and you add nothing else to that investment account. If then your child is 18 and you are 48, by the time you are 65 years of age, thanks to compounding interest and assuming an average growth of 7%, your $12,000 investment would have possibly grown to $53,000.
It’s so important not to fall into the consumerism black hole. When you’ve been without for so long it is so easy to want to acquire things, but postponing instant gratification for a while will buy you something better. Piece of mind.
