How A Six-Year-Old Saves For Retirement
In our society of conspicuous consumption and spending-beyond-means, many parents face an uphill battle to encourage children to save for the future, resist instant gratification, and most importantly, understand how to budget and use credit wisely. At a recent dinner party with a group of parents with young children, the conversation turned to this exact topic. When I shared how I teach our kids about money, these parents encouraged me to write an article to share my approach. This article explains how my wife and I attempt to instill financial values in our six-year-old son. I recently began giving our six year old an allowance, but with a twist.
It’s never too early to learn about taxes. As Benjamin Franklin said, “The only things certain in life are death and taxes.” My six-year-old receives a gross allowance of $6 per week (one dollar for each year of his age), in the form of one-dollar bills. From this $6, he has to pay $1 in taxes to the Oghoorian-Family-IRS. In this way, he experiences the impact of “earning” (in this case getting) money and having to pay a portion of it to taxes. Of course the first thing he asked when I first collected taxes was what exactly his taxes pay for; my response was that his taxes pay for food, shelter, travel, and other services we deem “public” goods. So far, our son is subject to only a flat tax. But as his allowance grows with age (and he learns percentages), so will his tax bracket. I just hope he doesn’t get ensnarled in the Alternative Minimum Tax.
After paying taxes, our son must allocate another $1 toward savings; “forced savings”. Unlike the $1 tax that’s taken by the IRS, he gets to keep the $1 savings per week in a separate part of his cash box so that he can see it grow (rather than as a theoretical value he would see on a bank statement.) His savings rate is only 17 percent of his gross allowance, which is less than I typically recommend to my clients, but I wanted to keep things simple and in round numbers for now. Once he learns percentages, he will be required to save at least 20 percent.
Should our son be inclined to spend more than his net allowance, he may be granted a loan from the Bank of Mom & Dad at prevailing market interest rates charged by credit cards. A lower rate may be available if he’s willing to collateralize one of his toys. This will hopefully teach him the negative impact of interest as a debtor.
I also created a ledger, similar to an old checkbook for those of you who still remember them, for our son to write down his gross allowance, itemized deductions, calculate his net weekly allowance and his cumulative earnings and savings. This exercise strengthens his math skills and further reinforces the concepts already discussed.
Of course this is just the beginning. As our son learns more about money and saving, I will begin to introduce financial priorities that are important in our family such as charitable contributions and investing savings for capital appreciation. While he will certainly have to pay capital gains tax on his investment earnings, I haven’t decided yet whether to give him a tax deduction for his charitable contributions.
We hope that with this early and continued education in sound financial planning, that no matter what our son grows up to be and do in his life, he will always spend and save wisely. Of course, even with all our good intentions, we never truly know what the outcome will be. Check back in 20 years to hear about how our allowance experiment turned out!
Have a question or need advice on how to manage your retirement accounts? Contact ACap Asset Management at email@example.com or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com