Teach Your Kid How To Retire By Age 30
“If only I knew then, what I know now”.
I find myself saying that all the time. If I knew everything I know now about personal finance when I was in high school, I would have already hit Financial Independence by now. Rather than feeling regret that I don’t have a time machine, let me pass along some tips to all the parents, uncles, aunts, teachers and coaches out there and encourage you to pass some financial knowledge down to the next generation.
Starting In High-School
The most important thing you can do to set your kid on the path to Financial Independence is engage them in a discussion about money. I write a lot about the importance of having transparent money discussions in relationships. That logic does not only extend to your spouse, but also to your children. As a parent, you are responsible for making sure your child is equipped for the world. We know that kids aren’t learning personal finance in school, so who else, if not you, will teach them about money?
Some topics you might consider introducing your child to when you think they are ready:
Many of the people who reach Financial Independence by their 30s have one thing in common, they did not graduate college with a pile of student debt. Student debt has become a financial anchor for many young people.
- 7 out of 10 college students graduate with student loan debt
- The average student loan balance is more than $37,000
- Total student debt is more than $1.5 Trillion
- The delinquency rate (meaning 90 days late on payments) is at 11%
If you have the money to simply pay for your child’s post-secondary education, then pat yourself on the back. You are in a growing minority and will be providing your child with a financial advantage not afforded to most.
For the rest of us, here are some tips to help reduce the amount of debt your child will take on to get a college education:
Take AP or CLEP Exams. The Advanced Placement (AP) and College Level Exam Program (CLEP) are tests that your child can write in high school to receive college credits in particular subjects. Each college-level credit your child earns in high school is one fewer college course that your child needs to pay for.
These savings can add up huge and alleviate some of the potential debt your child would accrue if they had to pay for every single college credit. The added benefit is that writing these college-level exams will help prepare your child to hit the ground running in college and put them in the best position for a high GPA.
Consider a State School over Private Colleges. Unless you are graduating from a truly elite school like Harvard, the value of a college education between a state school and a private school is relatively small.
The further I am into my career, the less it matters what school I went to. Employers want to know what value I can bring to their organization, the words on my diploma are only a small factor in that.
What is not small, is the difference in tuition costs between a private and public university. If the state school costs $5,000 per year and the private school costs $40,000 per year, the private school costs an additional $140,000 over a four-year degree. Even more, if your child takes more than four years to graduate.
If you or your child are set on them attending a private College.
Apply for every scholarship possible. I recently wrote how one couple leveraged their jobs working at a golf course to land a “full ride” scholarship which allowed them to graduate with zero debt. The fact of the matter is even with student debt as bad as it is, we leave $3 billion in unclaimed education grants unused every year.
Teach Your Child How To Cook
Breaking Down the Cost Restaurants & Meal Kitsmedium.com
Perhaps the best thing you can do to ensure your child is both physically and financially healthy is to teach them how to cook. Not only is cooking your own food a healthier alternative to eating out, but it will also save them a boatload of money over their lifetime.
Eating out at a restaurant is one of the worst financial decisions you can make. According to a report from Wellio, it costs nearly five times more money per serving to eat at a restaurant than cooking the same meal at home. Meal kits are not much better, pre-packaged meal kits cost, on average, three times more money than buying and cooking your own food.
Teach Them Why Not To Buy A Car
My biggest regret about my job is that I need a car for the constant short haul travel. Cars are a money pit. Put aside the fact that sometimes we buy a “lemon” that needs constant maintenance just to keep it on the road. Between gas, insurance, maintenance, payments and interest, the average cost to own a car these days is over $8,000 per year according to AAA.
If your child opts for a transit pass over a car, and invests the difference they will build hundreds of thousands in wealth over their lifetime and they will need less money to cover their day to day expenses. This will greatly reduce the time it takes for them to reach Financial Independence.
Housing is the average person’s largest expense. Therefore, one of the easiest ways to save more money and build more wealth is to eliminate this expense. House hacking is the act of having someone else pay for part, or all, of your personal housing costs.
The absolute worst way for your child to manage their housing costs is to buy or rent a large 4-bedroom house, in which they are the only one living in the house. They will be paying for space they don’t use and as a result will have less money to save and invest.
Some forms of House hacking for your child to consider:
- Living at home for as long as possible (or as long as you allow)
- Having as many roommates as possible
- Buying a condo and renting out the extra bedrooms
- Buying a house and renting out the extra bedrooms
- Buying a multi-family property (multiple separate apartments) and renting all the extra bedrooms
- Doing any combination of the above plus using Airbnb to rent out their own bedroom when they are not around.
If done properly, house hacking has the potential to take housing from the largest expense in your child’s budget, to something that provides them with positive cash flow.
Teach Them About The Power Of Simple, Low Cost Investing
So, if your child has graduated college with no debt, they cook their own food, they don’t buy a car and they engage in house hacking, they will likely have a lot of extra money at the end of every month. If they want to build wealth that has the potential to last over the long haul, they will need to know how to make their money work for them.
Two things they should know.
- Diversification is important.
- Investment Fees Add Up Over The Long Run
Ever heard of the phrase, don’t put all your eggs in one basket? If you invest all your money in a handful of stocks, and those stocks go in the tank, you can lose your shirt in the stock market. If you invest into index funds or mutual funds, your money is invested into hundreds of different stocks, and if one goes down it’s likely another is going up.
The other important factor of diversification is diversifying across asset classes. Meaning investing in stocks, bonds, real estate and other reasonable, income-producing assets. If the stock market tanks, you’ll be happy you have some money in bonds to smooth out the ride.
If you want to teach your child a quick rule of thumb for how to diversify between stocks and bonds, the Rule of 110 is helpful.
On Investment Fees
If there is one thing your child needs to know about the stock market it’s this. You have no control over what happens in the stock market. Everything can be going along great until one day the President Tweets out that he’s a ‘Tariff Man’ and the market can quickly tank.
The only thing you can control as an investor is the cost and fees you pay for the privilege of investing. The more you pay in fee, the less wealth you will accumulate over your lifetime.
For those reasons I choose to invest in low cost, index funds that track stock, bond and real estate indexes from around the world. Above all else, you should encourage your child to do their research, speak with financial professionals and make their own (informed) decision about their investment strategy. Just as long as they invest.
Stress that it’s less about RE and more about FI
One thing you don’t want to do in teaching your child how to manage money is instill an unhealthy obsession with money and saving. Reaching Financial Independence should not be an all consuming life goal. They need to enjoy life along the way.
I recently wrote about how FIRE is not about retirement, it’s about Empowerment. Financial Independence is not the end goal of life. In many ways ,it can be a new beginning of life. Reaching Financial Independence early in life allows your child to design a life that is on their terms, not on what their finances will allow.
I can’t think of a greater gift for a parent to give a child.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.