What I would teach children about savings

I do not have any children, so this discussion will be largely academic. However, if I had children, I believe that instilling the proper financial values so that children know what to expect from money is much more valuable than a 529 plan or any kind of donation, gift, or allowance. My parents saved about $16000 for me to spend on my education. However, through their actions they also taught me how not to spend money that I had not earned and that I had to save if I wanted something. Thus I did not spend that money on my education figuring that I should not use it because I had not earned it. After some prodding on their part I did use about $1000 on some furniture, but that’s it. I did not touch the rest until I had learned enough about investments to grow it better than the savings account it was sitting in.

In retrospect, I would gladly have exchanged that sum of money with the “idea” of saving money, investing it, and letting it work for me. I wish they had taught me that.

So here it the one savings/investment rule, I would teach to my hypothetical children.

  • Always save and invest 50% of your income.

If this idea is implanted early on, the person will hopefully always adjust his or her lifestyle so that the cost of living does not exceed 50%

Assume a modest allowance of no more than $10 before year 12 and investing half of that at 8%, the 12 year old would have a net worth of $2,000. This is approximately what the median net worth of a 30 year old is. Now add in some baby sitting, garden work, etc. topping out at $100 per week at age 18 at which point the kid would have a net worth of $15,000. Add three years of college with a weekend job and our graduate has a net worth of $30,000. I highly recommend against student debt other than using student debt in an arbitrage scheme. Taking on student debt to increase the standard-of-living is just plain crazy. Now assume annual raises and a starting salary of $36,000 that ends at $52,000 at age 30. At this point, our kid has a net worth of more than $300,000 and a capital income that is almost half the wage income. Staying at $52,000 for another 10 years and the 40 year old is a millionaire with an annual capital income for $80,000. This is what I would teach, not by telling, but by leading. It is what I do myself except that my rate is higher than 50% because I was a late starter.

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Originally posted 2008-01-08 07:25:19.