Saturday, December 3, 2011

Kids Birthdays & Saving For College.

Today, one of my oldest friends' (we go back to Sunday School at the rough age of 5) daughter celebrated her first birthday. As such is the case, I elected to give her a different type of gift which is actually quite similar to what my grandparents did for me; I am trying to get her on the track of investing. Whether or not she chooses to go about it in the way that I have, I don't care. But I know this: at some point, she at least needs to think about saving for college and retirement.

The way I figure it, rather than give a gift that will be thrown away or outgrown, I should give something that will grow with and stick with the child... It isn't like she doesn't already have a ton of toys and awesome clothes anyway. Do you really remember any of the toys that you got when you were a young child? I only remember a hand full of my favorites. Around my first birthday, I am told I was a really big fan of carrying around anything with an interesting texture (and for some reason, candles) but, have no recollection of it. The way I figure it, gifts really don't matter to a one year old and at that point, are much more about the parents and grandparents taking some nice pictures and making some good memories than anything else...

Later on in my childhood, I remember hating getting say, $50 to $200 dollar or so denominations of stock from my grandparents (a respectable, but not huge amount of money). It I didn't get T-Bills, it would be stocks such as Borg Warner, PPG, Pepsi, and Tricon- which was spun off of PEP and is now known as YUM!. However, due to the growth in the price of the shares, when it came time to buy a house, I had the down payment to buy a duplex and thus, start a business with. At that point, I realized just what I had been given. I saw the effects of compounding interest, dividends, and growth in the value of companies first hand. I also saw the various attitudes that came about from simply when a person was born...

Mom's mother, when opting to give me financial instruments as gifts, would give me government bonds or FDIC insured CDs, as she could remember the Great Crash of 1929 and losing their house during the Great Depression. From what I could gather, she thought that the stock market was some type of casino fraught with speculation, lies, skullduggery, and dash of pure evil. Dad's parents however, were born in the mid to late 20's. While they were greatly effected by the Depression, were small business owners and were not nearly as gun shy in regard to investing in the markets. Great life lessons were to be learned from both types of gifts. For these and many other reasons, I was lucky beyond belief.

I encourage all of my readers to think about this sort of thing and consider it when giving gifts to the young ones that they know. But enough rambling. Here is the letter that I wrote to my friends' daughter. Hopefully, she will read it when she is 10 or so and it will get her thinking:




Rather than get you a toy that will eventually be thrown to the wayside (much like Woody or Buzz in the “Toy Story” movies) or clothing that will be outgrown. I have somewhat selfishly elected to make an investment in your future, which is evident as being quite bright.

With the cost of education constantly on the rise, I hope that a meager gift of $20 dollars will be able to grow to offset a small part of your college expenses (if allocated properly, in a few decades, it might be able to buy you a semester’s worth of school supplies). While I have no idea what type of plan your parents will set up for you, I would imagine that it will be a plan along the line of a 529, but, there are many other ways to invest. I trust that they will go about choosing one that will greatly benefit your future. A calculator that I found online at estimates that your college expenses for 4 years of schooling will be approximately $200,000 dollars! Best to get a head start on this!

It is also my hope that this will get you thinking about saving and investment at a younger age than most. Here is part of an article that examines how much money you will have under different scenarios, by saving at various points in your life:

Consider this: Amy, a 22-year-old college graduate, saves $300 per month into an account earning 10% per year for six years. (That's the average annual return of the stock market over time.) Then at age 28, she starts a family and decides to stay home with the children full time. By then, Amy had kicked in $21,600 of her own money. But even if she doesn't contribute another cent ever, her money would grow to a million bucks by the time she turned 65. Compare that to Jason, who put off saving until he was 31. He's still young enough that becoming a millionaire is within reach, but it will be tougher. Jason would have to contribute the same $300 a month for the next 34 years to earn $1 million by age 65. Although Amy invested less money out-of-pocket -- $21,600 over six years vs. Jason's $126,000 over 34 years -- her money had more time to grow, or compound.

While this example is applied to people that are roughly my and your parents age, I hope that the example serves you well at whatever point in your life that you read this letter. You are privileged to be have essentially “won” the genetic lottery: the odds of you being born in America were less than 1 in 30. The fact that you were born to loving and quite capable parents are even less. You have the whole world available to you and starting to save for college will help you in your journey, no matter what path you chose to go on.

Again, happy birthday. I wish you many more.


P.S. Here are some websites that might be of uses for your parents (but, are certainly not the only ones out there with decent information):

Disclosure/Disclaimer: None. I have no position in any of the securities mentioned, though, that could change at any point. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.


Ravi Nagarajan said...

This is a great idea. Last week, I decided to buy shares of Disney for my nephew and niece through the Disney direct stock purchase plan (which includes a dividend reinvestment plan). Doing this for Christmas and birthdays makes a great deal of sense and can really compound over the years, whereas toys will be long forgotten and discarded! I think it helps to buy into companies that kids can relate to as owners over the years.

Anonymous said...

I have been doing a lot of thinking about this.

My life has been greatly impacted by "education".

In the future, people are not going to be able to spend $200k+ on a college undergraduate "education".

When you are spending that level of capital, your return on investment (EVEN IF THINGS WORK OUT) is going to be very low or negative.

How can you pay 4 years, or more, of your starting salary to get an "education"? If you have to borrow this money, your financial life will be ruined OR severely impacted.

The financial experts all say that your borrowing for an education should be more than 1 years starting salary.

The education bubble is going to come to end at some point....