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Make Your Kid a Millionaire
Episode 319

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Episode Guide

Equipping children with financial independence tools starts with teaching them the importance of saving and investing. The episode emphasizes the significance of using vehicles like Roth IRAs to encourage early wealth building, as children with earned income can contribute to these accounts. By investing even a small amount early on, their money can grow significantly over time through compounding. The hosts discuss the benefits of normalizing conversations about money in families and promoting an understanding of time value, showcasing how pivotal financial education is for setting up future generations for wealth creation. The episode features practical insights and resources, including a specific article that provides guidelines for parents to navigate these discussions and actions effectively.

Episode Timestamps

ChooseFI Podcast Episode Show Notes

Episode Title: How to Make Your Kid a Millionaire

Hosts: Brad Barrett, Jonathan Mendonsa

Episode Summary:
Teaching children the principles of financial independence and the benefits of starting early can set them on a path to becoming millionaires. By instilling skills rather than simply handing over money, parents can guide their kids in understanding wealth accumulation and the power of compounding. This episode highlights utilizing Roth IRAs for children, framing financial conversations around independence, and empowering kids to make informed financial decisions from a young age.

Key Topics Discussed:

  • Opening Remarks

    • Introduction to the episode and the topic of teaching children about wealth.

  • The Concept of Raising Millionaire Kids

    • Discussing how teaching financial independence can lead to wealth.
    • Key Quote: "Simply gifting wealth won't teach them; they need to learn the skills of saving and investing."

  • Using Roth IRAs for Kids

    • Explanation of Roth IRAs and their benefits for children.
    • Definition: "A Roth IRA allows after-tax contributions that grow tax-free."

  • Power of Compounding

    • Discussion on how compounding can significantly increase wealth over time.
    • Key Quote: "Understanding the power of compounding early leads to financial success!"

  • Incentives to Save

    • Strategies for incentivizing children to save money.
    • Mention of using matching contributions to encourage saving habits.

  • Teaching Financial Independence Mindset

    • How to framework financial lessons for children around independence.
    • Key Quote: "Early financial education cultivates a mindset for future success."

  • Conclusion

    • Summary of the discussion and encouragement to implement these principles at home.

Actionable Takeaways:

  • Start a Roth IRA for your child if they have earned income to take advantage of tax-free growth.
  • Set up a matching contribution program with your children to incentivize saving.
  • Engage in financial discussions with your children, focusing on autonomy over traditional retirement planning.

Discussion Questions:

  • What strategies can parents implement to start financial discussions with their children?
  • How can financial independence be framed to make it relevant to children?
  • What age is appropriate for children to start learning about investing?

Speaker Highlights:

  • Brad Barrett: Focus on actionable strategies for teaching children about financial independence.
  • Jonathan Mendonsa: Guiding the conversation around engaging children in financial discussions.

Important Quotes:

  • "Framing discussions around financial independence empowers action."
  • "Empowering kids to create their own wealth is a game changer."

Podcast Intro:
You're listening to ChooseFI. The blueprint for financial independence lives here. If you're looking to unlock the secrets to financial independence and early retirement, you're in the right place. Stay tuned and join a community of like-minded people who are getting off the hamster wheel and taking control of their lives in the pursuit of financial independence. ChooseFI, your home for financial independence online.

Podcast Extro:
You've been listening to ChooseFI Podcast, where we help middle-class America build wealth one life hack at a time.

Teaching Children Financial Independence: A Path to Wealth

Financial independence is not just a goal for adults; it's a vital concept that can and should be introduced to children from a young age. By instilling financial literacy early, parents have the opportunity to set their children on a path toward wealth accumulation and financial independence. Here’s how you can equip your kids with the knowledge to become financially savvy and potentially millionaires.

The Importance of Financial Literacy for Kids

Teaching children about money management helps them understand the value of money, saving, and investing. Simply gifting wealth in the hopes they learn will not equate to financial success. They need to grasp how to save, invest, and manage their finances. Early education about financial literacy empowers children to take control of their futures and encourages them to think critically about money.

Key Takeaway:

  • “Simply gifting wealth won't teach them; they need to learn the skills of saving and investing.”

Start with Age-Appropriate Conversations

Conversations about money should be pragmatic and relatable. Framing these discussions around financial independence rather than retirement makes the concepts accessible. Teaching children that they can take action to improve their financial situations instills a sense of autonomy and encourages them to engage with financial topics.

Practical Steps:

  1. Introduce the Concept of Financial Independence: Explain that financial independence means having enough wealth to live without needing a job, giving them some autonomy over their lives.
  2. Utilize Creative Language: Instead of saying "retirement," use concepts like "options" and "freedom" to spark interest and understanding.

Leveraging Roth IRAs for Children

One of the most powerful tools for fostering financial independence is the Roth IRA. Many parents overlook this excellent opportunity for their children, but if your child has earned income, they can contribute to a Roth IRA, potentially growing tax-free for decades.

Benefits of a Roth IRA:

  • Tax-Free Growth: Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals are tax-free, allowing funds to compound without incurring tax during growth.

Actionable Advice:

  • If your child earns income (such as from babysitting or part-time jobs), encourage them to open a Roth IRA.

Incentivizing Savings with Matching Contributions

Encouraging a savings mindset can be enhanced through matching contributions. Similar to employer-sponsored retirement plans, parents can implement their own matching contributions plan to help their kids understand the benefits of saving.

Strategies:

  • Create a Matching Program: For every dollar your child saves, consider matching a predetermined percentage. This can motivate them to save more and demonstrate the benefits of saving over spending.

The Power of Compounding

Compounding is one of the most powerful concepts in investing. By understanding and leveraging the power of compounding, children can grasp how their savings can grow exponentially over time.

Example:

  • If a child starts saving early, they may see their contributions grow significantly. For instance, a mere $3,000 contribution at age nine could grow to over $124,000 by age 64 based on average market returns.

Key Concept:

  • “Understanding the power of compounding early leads to financial success!”

Building Trust Funds for the Next Generation

Rather than raising “trust fund babies,” empower your children to build wealth for themselves. Teaching them to save, invest, and manage their finances effectively prepares them to be responsible adults.

Psychological Benefits:

  • Early financial education cultivates a mindset where money is seen as a tool for achieving dreams rather than just a means to spend frivolously.

Establishing Good Financial Habits

Creating good financial habits early on sets the stage for lifelong responsible financial behavior. Start small but be consistent, reinforcing these habits with ongoing discussions and education about money management.

Action Steps:

  • Discuss your child's financial goals and ideas regularly.
  • Encourage them to think critically about their spending and savings.

Age-Appropriate Financial Education

Tailor financial lessons to your child's age and capacity to understand the information. As children grow, you can introduce more complex concepts, ensuring they build on their foundational knowledge of financial literacy.

Conclusion: Empower Your Child’s Financial Future

By teaching children the principles of financial independence early, you empower them to take charge of their financial futures. Start conversations about money now, make use of tools like the Roth IRA, incentivize savings, and nurture the understanding of compounding.

The earlier you start, the more significant the impact on their ability to manage their finances later in life. From simple saving habits to understanding investments, the journey to financial independence begins with you.

Key Resources:

Do you want to give your children the tools they need to guarantee their path to financial independence? If you give them the right skills, becoming a millionaire can be a mathematical certainty.

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What You'll Get Out Of Today's Show

  • Achieving the objective of becoming a millionaire isn't nearly as important as the process of getting there. Success is in the journey.
  • For many of us, we made a lot of mistakes before finding the right information and learning that there is a better way.
  • When you understand the power of compounding, you know how plausible it is to become a millionaire, and what you need to put away each month to get there.
  • Much of the journey comes down to mindset, empowerment, and believing that you can make changes to better your life. It starts with the little changes that make your life 1% better.
  • It's time to stretch the tactics we use and apply them to a different age bracket. We generally talk about investing timelines starting around the age of 20. But how early could you really get started and why would you want to get started at an earlier age?
  • For Brad, the reason is dual-pronged. He thinks the concept of saving for retirement is misdirected and he would frame it differently. Retirement is so far in the future, it's harder to get behind during your younger years. However, the concept of financial independence is something people are more willing to take action on.
  • Financial independence means you can control your time and have the autonomy to make decisions and you can take advantage of retirement vehicles such as 401Ks and Roth IRAs to reach FI.
  • Financial independence is a better framework for talking about and planning what it is you want to do with your life as well as giving yourself options.
  • The Make Your Kid a Millionaire article emphasizes Roth IRAs. Brad says there has never been a great explanation of how people can take advantage of a Roth IRA for children who have earned income.
  • Most children don't have jobs that allow them to contribute to a 401K, 403b, or 457. A source of earned income does allow them to make after-tax contributions to a Roth IRA where that money can grow tax-free forever.
  • A 12-year-old will have 47 years of compound growth before making withdrawals. All of the growth, dividends, and capital gains distributions will be tax-free compared to an investment account where they would be taxed.
  • The current limit for Roth IRAs is $6,000, but you may only put as much of that limit in as you have earned. A child earning $5,000 in a year would only be able to contribute $5,000, not the $6,000 limit.
  • Although ChooseFI doesn't generally suggest the Roth IRA as the first investment vehicle to use, the strategy is different for children.
  • For adults, some financial independence strategies help to control your marginal tax rate using specific pre-tax retirement accounts.
  • When adults are in a low marginal tax bracket, an argument can be made for locking in the low tax rate with Roth contributions.
  • However, children with much lower incomes, already have low marginal tax rates. Since they can generally only choose from traditional or Roth IRAs, it's likely in their best interest to pay the small amount of tax and then shelter that income from taxes for the rest of their lives.
  • Although allowance and pay for chores around the house don't count for earned income, there are some categories of work kids may do that do count but you'll want to be careful documenting, such as newspaper routes, babysitting, mowing lawns at other people's homes, acting, photography, acting, modeling, or working for a parental-owned business.
  • Regular jobs at private or public companies that comply with your state's child labor laws definitely count as earned income.
  • In the article, an example used discusses a child who mows lawns and earns $4,000. His parents decide to contribute $3,000 to a Roth IRA. The contribution does not need to be made with the exact same money the child earns. Parents or grandparents could make the contribution as long as it does not exceed the earned income or IRA contribution limits.
  • Matching programs are a great way to teach financial lessons. Similar to a company 401K match, parents or grandparents could incentivize a child to contribute to their Roth IRA by agreeing to match contributions dollar for dollar, or two dollars for every one.
  • If a 9-year-old were to put $3,000 into a Roth IRA once, never contribute again, and not touch it until the traditional retirement age of 64, that child would have almost $124,000.
  • With the power of compounding, a child needs to contribute just $1,500 each year of their lives to ensure a million dollars at a retirement age of 64.
  • In contrast, someone waiting until the age of 31 to begin investing and maxes out their Roth IRA with $6,000 each year until age 64 will only have $764,000. The difference between the two net worths is the result of the powers of compounding and time.
  • The Rule of 72 is a way to predict how many years will take your money to double based on an interest rate. You take the number 72 and divide it by your interest rate. 72 divided by an interest rate of 7% results in money doubling roughly every 10 years. Compounding on a big number adds up quickly.
  • A child could theoretically put in a large amount for just a few years, never contribute again, and end up with a higher net worth than with the $1,500 each example.
  • The article contains different scenarios to help foster the conversations parents can have with their children about the impact time can have.
  • Break through the initial resistance to get started and set up a system to reinforce good financial habits so that your child can build their own trust fund.
  • It's hard to put a price tag on the psychology of teaching your kids about investing early. They will have a better foundation and desire to learn and get even better. It's good to teach them the time value of money while they aren't relying on it to pay for their survival needs.

Resources Mentioned In Today's Conversation

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