Teaching Your Kids About Money - Part 3

"I want my children to have a good start in life."

Don't we all? No, that doesn't mean spoiling them rotten, though we often wish we could. We want to give them a solid leg up so they can achieve their own financial security.

Fortunately, there is much you can do to help bring that about and to help assure that your children, whether still in a high chair or already in high school, can enjoy a lifetime of financial security.

1. Start young to help them understand the concept of money and how it works. When my daughter was four years old, she'd help me pick out toll money when traveling by car. When we'd go shopping, I'd casually explain why I bought one brand versus another. "By getting this one, we can now afford to go out to lunch with the money we saved."

2. Help them cultivate the savings habit by establishing a savings account at your bank or credit union. Set it up in their name and encourage them to make regular deposits. One way is to match their deposits. Let's say your ten year old son saves $5 a week and you match each deposit dollar for dollar, so a total of $10 goes into the account each week, or $520 a year. When he's ready to buy his first car in a few years, the down payment, if not the whole amount, will be waiting for him.

3. Teach them how to spend money. That also means letting them make mistakes. When I was a kid, I blew a whole dollar on penny candy, one hundred pieces. It sounded like a good decision at the time, until the ice cream truck came down the street that evening and I had no money. No, I didn't get ice cream that day, though my parents did explain how I could have had some candy and some ice cream if I had chosen more wisely. The point: Take a proactive approach to educating your children about money and how to use it wisely.

4. Set up a college fund This link will open an external site in a new browser window. and help them save money for college. If you care about your children and want them to have the best possible opportunity for a financially secure future, make sure they have the opportunity to get at least a four-year college education. Every bit of research done on the subject shows that there is a direct correlation between education and income.

More ideas for helping your children achieve financial security:

• Begin their retirement IRA now. This may sound silly at first — setting up a retirement IRA for your ten-year-old — but it's never too early to start. If they earn an income, your children can begin making IRA contributions at any time. (Or, like many parents, you can make the contribution in their name, provided they have verifiable income.)

Let's say your 15-year-old earns $500 this year doing part-time work. Contributing $500 of your own money into his or her IRA may be a good investment in your child's future. This gets the ball rolling. Eventually, your child makes his or her own contributions. Then imagine 50 years from now: Depending on the average return, he or she could potentially be a millionaire several times over. And it all started this year because you helped set up that IRA.

• Update your life insurance program. As long as your children are minors, they are dependent on you for their financial security. If you die prematurely, all your dreams for them could be jeopardized. That's why you should make sure your life insurance program reflects not only your own needs and current income, but your goals and dreams for your children. How much is enough? That's your call. The best bet is to get good information. Discuss your needs — both current and future — with your agent. And don't put it off. Some things are too important to delay.

• Start their life insurance program by purchasing coverage on children as early as possible. Their rates will never be lower. Many will allow them to increase their coverage at certain key times in their life — such as when they turn 21, marry, graduate from college, or have children of their own. In this way, you are helping carry on the legacy by helping your children protect their children.

The bottom line: If you love your children, hugs and kisses are one way to show it. Another way, one that will stay with them and prove itself day after day for the rest of their lives, is to help them build their own financially secure future.

Teaching Your Kids About Money Part 2

Let's say your child just came into a big chunk of change. Perhaps he or she received it for graduation, as a holiday gift, in celebration of a major birthday, in recognition of a religious rite of passage, or because their parents or grandparents have decided that it's time to learn how to handle more than a few bucks at a time.

Or, for the sake of simplicity, let's just say it came from their favorite aunt. Dear auntie has decided to give your child, little Susie, a check for $2,000. No, she's not nuts, she just likes litte Susie. (All those "Yes, Ma'ams" and "Thank you, Ma'ams" have finally paid off.)

So, what is your child going to do with that cash? One option is to hit the mall running — spend it on new clothes, electronic games, sports equipment, and more. In short, have a ball.

Two grand can buy a lot of fun. Little Susie could be living large for a couple of months, even longer. This unexpected lump sum is called a windfall, and that's what many people would do with it, spend the cash like it was burning a hole in their pockets.

However, why not consider another strategy for your child's newfound wealth? This is an option that can potentially profit them for a lifetime, not just a few weeks or months.

Put that money to work for little Susie. Think of it as seed money. Let's say you "planted" that money in an investment where it earned a good return.

Let's say it grows at a rate of 6%. This means that, at the end of one year, your child's money would grow from $2,000 to $2,120. That's an extra $120.

Big deal, Susie may think. What's $120? Let's put it in perspective. If little Susie gets an allowance of $10 a week, that's 12 weeks worth of allowance you've generated. Or if your child works a part-time job and earns $30 a week, the "seed" money has earned them a month's worth of income — and he or she didn't have to cut one lawn, flip one burger or put up with one thinks-he-knows-it-all boss. Your child has their your money working for them!

Best of all, even if you took the profit, that $120, and spent it, your kid would still have the initial $2,000. But let's not stop there. Let's further say that you kept all that money working. By the end of year two — assuming the same 6% rate of return — the money would now total $2,247.20. Thanks to compound interest — which earns interest on interest — your child has "earned" nearly $250.

Not bad for just sitting back with your arms crossed. Let it sit for 10 years and it has the potential to nearly double, growing to $3,581.70, generating a profit of $1,581.70. (By the way, if you squeeze out another two percentage points, so your money grows at an average rate of 8%, you will have turned your initial $2,000 into $4,237.89 after 10 years. That's because the higher your rate of return, the larger your initial money grows.)

This, by the way, is how many wealthy people get to be wealthy people. But remember, as with all investments it is possible to lose money as well.

Okay, now let's be realistic. Your child needs to have some fun, right? Accumulating money for its own sake is boring. So, when does little Susie get to spend at least some of her money? Here's one smart-money strategy: Why not take half of your child's profit every year for fun, leaving the rest to work for them? That way, the money has the potential to grow, but your child also get to spend some of it.

For example, take $60 — that's half the first year's profit of $120 — and use it to buy something special, such as holiday gifts for your family or a new gotta-have gizmo for your child. Keep the rest slaving away for you. At the end of the second year, you will have $2,183.60. Once again, if you take half the profit above the original $2,000 gift, that gives you $91.80 to spend. After year three, you will have $108.66 pocket money, and so on.

Keep doing this year after year and... well, you get the picture. So, now you know one good way to build wealth for your kids. Your big challenge now is to just figure out how to get little Susie's aunt to give her that money to get started.

Teaching Your Kids About Money - Part 1

If 14-year-old Damon Williams can become an investor, and accumulate $50,000, so can you. Williams, a member of a junior investment club in Chicago, has been learning about stocks, mutual funds and other investments since he was six. Currently he is featured on an episode of the public television series, MoneyTrack, entitled “Kids and Investing."

He is an excellent example that when it comes to teaching your chidlren about money. Kids are never too young to start learning about the importance of money and how to start saving for their futures.

Talking to your kids about money requires that you explain the concepts in ways that they can understand. When they realize that money decisions determine 90% of the decisions they make in life, such as whether or not they can afford to spend time with their friends; where they buy their clothes; whether they can purchase one music CD this week or two, the concept of saving and having money will become very important.

Here is a simple overview of how to begin the conversation with your kids.

Explain That There Are Two Ways to Make Money
People at work and money at work

• People at work — that's when you work at a part-time job, cut the lawn, earn money. We all do it. Most adults work about 40 hours a week, 50 weeks a year, for 30 or 40 years.

• Money at work — that's when you put aside a portion of every dollar you earn or receive. If you invest it wisely, this money can make money for you.

Kids can start learning about stocks, mutual funds and other investment vehicles, from the following sources:

• Parents

• Talk to your school about setting up an investment club

• Visit Web sites about investing for minors

• Have a goal - Perhaps it is to retire at age 30; to take the pressure off your folks and pay at least a portion of your own college education; or to sock away enough money for your first car. Decide the amount you need and the date you want the money to be available.

Include Your Children in Saving for their Future
You have a number of options

• Develop a system for you and your child to put money aside on a regular basis. Let's say your child has a job and a goal to have $500 for a new _________ (you fill in the blank here) two years from today. That means (ignoring interest your money may earn) you need to set aside just under $4.81 a week (4.81 x 104 weeks = $500.24).

• Figure out where the money will come from. Some minors take a percentage of everything they earn or receive (such as 20%) and put it toward their wealth-building goal. Others talk to their parents or grandparents about "seed" money (an initial amount of money invested to build wealth).

• Select investments that interest your child, whether it is shares of their favorite apparel store at the mall, electronic game manufacturer, computer, etc. When an individual buys ten shares of, say, Dell Computers, explain that this makes your child a part owner in the company. That's also why some minors put companies such as Disney, Nike, The Gap and McDonald's on their stocks-to-study list.

• Stick with quality. That goes back to doing your homework. Remember, the goal is to make money, not lose it. Find a company you and your child likes AND that looks to be a quality investment. Please keep in mind that with any investment, there is the risk of losing money. Steer clear of hunches or companies that simply have names that sound intriguing.

• Get good advice. There are a lot of people who can help you learn and made good decisions. One place to start is with a company like Alero Equities. Together with your parent or grandparent, our representatives can discuss your goals and offer direction and guidance.

Remember This: Money Begets Money
Take advantage of compound interest.

Put the money into a reliable vehicle and let it work for you. Slow but steady won the race between the tortoise and the hare. In other words, don't expect to make a fortune overnight. Successful investing takes time and patience. Forget stories about instant riches. Set up a plan and stick to it. That's the best way to help assure your long-term success.

The bottom line: Now is the time to begin teaching your children about the ins and outs of investing and wealth building. This helps you lay the foundation today for your child's long-term financial security. Contact Alero Equities at 1-866-354-5125 to schedule an appointment to discuss you and your child's investment plan.

Life Insurance Facts

All life insurance policies have one thing in common: They provide a tax-free death benefit to your beneficiary when you die. But that’s where the similarities stop. Here, the Maryland Association of CPAs offers an overview of the most common types of life insurance to assist you in determining which best meets your needs.

Term insurance

Term life insurance policies offer death benefits only. Term insurance is simple to understand and it allows you to purchase the most coverage for the least amount of money. You buy a policy for a specific amount and term -- 15 years, for example. If you die during that term, the policy pays the death benefit to your beneficiaries. If you outlive the term of the policy, you get nothing. However, you can renew the policy at much higher rates or convert the policy to a permanent form of life insurance.

The two key types of term insurance are level term life insurance (in which the premiums remain the same over a specified period of time) and yearly renewable, which starts out with a lower initial premium, but the premium rises each year.

Whole life insurance

Rather than insuring you for just a part or a “term” of your life, a whole life policy is designed to cover you for your entire life.

Whole life policies cost more than term policies because, in addition to providing a death benefit, a whole life policy builds up what is referred to as "cash value." This is essentially an investment component that, after a certain number of years, you can withdraw or borrow against. (Unpaid loans against the policy are subtracted from the death benefit.)

The investment return on a whole life policy is likely to be lower than what you might earn investing on your own, because insurance companies typically invest conservatively.

Universal life insurance

Flexibility is the key selling point of universal life insurance.
With this type of whole life insurance, you can increase or decrease the death benefit as your insurance needs change. You can, within limits, determine how much of your premium is used for insurance and how much goes toward the policy’s investment component. You can also increase or decrease the amount of premium payments and how often you pay them.

Variable life insurance

Variable life insurance differs from whole life insurance in that it allows you to invest the cash value of the policy in stocks, bonds or money market funds within the insurance company’s portfolios.

With a variable life policy, both the death benefit and the cash value depend on the performance of the investments you choose, but most policies guarantee that the death benefit will not fall below a specified minimum.

A variable life policy is considered a security and sold only by prospectus.

Making the decision

The type of life insurance you buy will depend on your individual needs and what you hope to get out of your policy. It’s important to consider how much protection your family needs, how long you need coverage and how much you can afford to pay in premiums.

If what you need is strictly income protection for a set amount of time, term insurance is the more appropriate and cost effective option. Term insurance works out particularly well if you follow the principle of “buy term and invest the difference.” This means you set aside and invest on your own the money you would have spent on a more costly whole life policy.

For people with more complicated or long-term needs, whole life insurance or one of its variations may make sense. For example, if you have contributed the maximum to your retirement savings and other tax-sheltered plans, you might consider whole life insurance because the cash value in the policy builds up tax-free.

As is the case with most important financial decisions, your life insurance choice should be made within the context of your overall financial plan and circumstances. A Financial Advisor can help you determine the type of policy that works best for you.

Financial Advisers are equipped to address your full range of financial needs with integrity and insight. In California Financial Advisers must pass a rigorous two-day examination, and adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state.