I have a second child on the way in a few weeks!!
A few days ago, my wife found some U.S. bond bought for her when she was born. My mom had created a money market fund for my son that was 3%. When I was a kid – you could go into a bank and get a savings account with 5% interest!!!
All of that is now in the shitter in 2020. There was so much I didn’t know. Making money was one thing – but how to SAVE and how to BUY things were never really taught to me. These real lessons only became evident much later in my life. I’m hoping that some fellow parents that read this could get some usefulness from it.
Just recently, I had turned my son on to some coin collecting and he and his buddy found that a lego set I had bought him years ago for $200 was now being sold for $700. He is obsessed with these things called “pops” and he wants to buy and hold a lot of these. I can see the wheels turning in his head. He’s REALLY good at math, but he doesn’t seem to have a lot of interest in sports these days other than watching the Eagles. However, he does seem to have an interest in how things seem to go up in value. I can work with this.
I’m going to go through some phases of my life and reflect on some things I wish I had done better. Maybe my sons will get something out of this as well!!
This is a roadmap, if you will, of how I want to advise my children. You do you. This is NOT financial advice but advice I’m giving my children.
Savings – I always had a hard time understanding savings. I get the “rainy day” fund but it was money that just sat there. Worse yet, due to inflation, my money was LOSING value. Long story short, if real inflation is 4-5% each year, and your bank is paying you 1% interest, the purchasing power of your dollars depletes every year by 3-4%. Now, the 10 year treasuries are now at .6%? Today, we look to be at the onset of another Great Depression and it’s more important than ever to be able to tuck money and investments away because no one knows if this is a 3, 6, or 120 month issue here. We are at the heels of perhaps a generation-long cold war with China, and this promises to have a lot of goods cost more. So – I’m also at odds with my better half at times on what not to spend money on, and where we need to focus given there’s a lot of uncertainty ahead. I could be out of work in 10 weeks as well. Lots of things up in the air cause uncertainty – and this is a killer of stock markets.
Anyway – The concept here is to tell junior that money that goes IN to savings needs to WORK for YOU. I never understood this. Ever. Until recently. How sad.
The thought was you just had $20,000 sitting in a bank account growing cob webs. This is not the case, or at least it shouldn’t be the case for you.
Savings should be put into a pie chart, of sorts – and in reality, it will be seeds planted in many places. The less expenses you have, the greater percentage of your income should go into savings, whether this is mowing the lawn or scoring your major bonus at work. How this sort of comes together:
Pre-college – 50% savings, 50% expenses
College years – 50% savings, 50% expenses
Post college years – 50% savings, 50% expenses
Marriage/child phase – 25% savings, 75% expenses
Empty nester – 75% savings, 25% expenses
Above is just a rough, rough, rough estimate. Every single person will have to tailor a strategy for themselves. Every person has unique needs, tastes, and circumstances – but the concept here is that when you have less responsibilities, you should put more into savings.
What to DO with those savings??
Here was my huge, huge downfall.
I put $200 in the bank, now what? Do I use it for a vacation coming up? What about furniture to buy? An alarm clock? What about painting the house? How much should I put in savings? I want a new car radio. I want new brand name sneakers. How much should I hold there indefinitely?
I think with where we are now in 2020, a lot of people need to really re-program how their lives are going. It will either happen by them proactively doing it, or the market will force you there.
My problem is, money went in to savings, and then it came out of savings just as quickly. There was always something to covet. A new video game system my buddy has. A brand new car. A bigger TV. This country is built these days on rip roaring spending and credit. GET IT NOW, figure out how to pay for it later. Which is half the reason we’re in this mess today.
The truth is, have you ever seen one of those devices at a gas station or the like where you give them a $50 or a $100 bill and it gets slid into it so the cashier doesn’t have access? That’s what savings is SUPPOSED to be like. But…it’s not just going to sit there.
It’s going to make money for YOU!!
Three asset classes, plus a slush fund
When I thought of savings growing up, it was that savings account that would stare back at me every day with a number in there begging to be spent. Well, let’s look at savings becoming INVESTMENTS. Yes…once again folks, for those of you who are slow – this is NOT FINANCIAL ADVICE. This is how I will teach my children about money. If you find something of interest here, run it by your financial advisor, accountant, doctor, interior decorator, and hair dresser. Just don’t sue me because you cannot read.
One thing my finance professor said during my MBA – “you always want 3-6 months of bills in your savings for the FU fund”. The point here he was making was during an ethics portion of his class. If you have ever had an employer ask you to do anything unethical, you can simply leave your job. You are not encumbered to him or her if you have your own savings and can find another job.
So – step 1 is CASH. This is your SLUSH FUND. If I was starting this at 16, I’d look at 6 months worth of expenses. At 16, this might be:
- Car payment to dad for $100 per month
- Car insurance at $80 per month
- clothing/mall/spending money $200 per month
- presents, gifts, miscellaneous $100
Total expense per month are $455.
This might be a little high, but let’s round it to $300 because if times got really tough, you are cutting out mall spending, presents, and gifts. Let’s say you are looking for 3 months of expenses, so I’m going to START with saving $900.
This is your CASH SAVINGS position. If you lose your job at Burger King, you can keep paying your insurance and car payment until you get a job at Dairy Queen.
Cash is how you transfer current value between asset classes as well.
The three amigos: Commodities (gold/silver), real estate, and stocks/bonds
Step 2 is probably going to be something a little more complex for a 16 year old, but get this: When he turns 18, I’d like for him to understand precious metals and how they work, how real estate works, and how stocks/bonds work. Each of these asset classes performs better at worse at different times. At one point 20 years or so ago, bonds were at like 10%. It made sense to put large portions of cash at that. Today, that isn’t the case. Gold has been on a tear for 2 years and has the promise to grow a lot more in the next 5 years. So you need to be flexible enough to know where to grow your base wealth.
What I would do as a 16-18 year old would be to take the additional cash made and stash it away for when he is 18. The $900 is sitting there, but maybe over 3 summers in high school he could make $15,000 working at Burger King, mowing lawns, etc. This cash position will be activated soon enough into the asset classes above. Right now, he’s really too young to own anything in these asset classes, but is building a cache of cash to lead an aerial assault soon enough….
We’ll get more into the 3 asset classes below, but for now, it’s worth noting these in the back of your head.
Hint 1: Get a used car that is safe. Don’t care if it’s a minivan. Use leverage by saving up money and putting a down payment on a car with your parents. The car is $4,000 and you put $400 down. You owe your parents $3,600 over 3 years, or about $100 per month with 0% interest. Maybe there’s an interest payment to show him about how amortization works? Maybe you teach him to put 10-20% down? This car will probably get beat up, so don’t go too expensive. Some of your non-savings cash should be budgeted for repairs, but you can dip in to your savings cash to get repairs, as long as you repay your savings cash immediately. This car is to probably last 7 years through college. That is the plan, anyway!!
Hint 2: Learn to work with your hands during these summers. If you have friends of your parents that work in real estate rehabs, see if you can learn how to repair and fix up houses. Work with lawns and landscaping. Learn to change your own oil. Learn to fish and hunt. Learn how to grow plants. I played all kinds of high school sports and played in the band. If you have all kinds of free time, you need to learn to work with your hands. I regret not doing this.
School work: you need to take an accounting class and an entrepreneurship class. Take honors/AP classes as these will help you get into a decent college. You do not need to go to Harvard. That being said, if you want to work with your hands and not go to college, so be it. I’d advise college as a primer, and if you still choose to work with your hands, you can use that college education to advance further in your career to be a foreman/manager or use it to help build your own business.
The college years
I had dreams of going to UPenn and then law school. Or Villanova and then law school. My parents divorced when I was 16, and this then became whatever college we could afford. I was accepted early in to York College of Pennsylvania, which I quickly grew to love at the time. It was $7,000 per year, a private school, and one of the best criminal justice programs in the state. I graduated my undergraduate with $14,000 in debt. That has since ballooned with 6 years of graduate school and 2 master’s degrees – but I also did a ROI on that and it has paid for itself many times over. So – your mileage may vary. A master’s in political science might not necessarily get you anything.
Today, college costs are insanity. With next to free lending, colleges just decided to continuously jack up prices. They added more and more majors. I’m sorry, but there’s tons of majors right now that when you graduate, there’s not a damn thing you can do with it.
Today, I’d look at the big picture of college for an undergraduate:
- The first 2 years of college, I’d probably stay local. Community college or a college close enough where you could commute. College housing costs are astronomical and this is how many students fail out in their first year. No one cares if you got your Math 101 at Harvard or Harrisburg Area Community College. They only kinda sorta care where your 4 year degree is from. You can live with your parents yet, avoid housing costs, and have some freedoms you didn’t have in high school – but without the ridiculous costs or the temptations that had many of my friends dropping out of school from.
- College isn’t about getting a 4.0 unless you want to go to a prestigious law school. It’s about learning concepts, applying them, and networking with people. The people you meet here can become business partners, sports friends, or lifelong friends. What I care about as an employer is not if you got a 3.8, but if I could teach you things quickly. If your college transcript has high grades in maths and sciences but you struggled in art history, ok. Who cares. Pass the class.
Financing college becomes even the bigger question these days. Who the hell has $55,000 for a poetry major yearly at Brown? The concept is to borrow from the Fed, when you can, at low interest rates. Avoid unnecessary costs. Leave school with a low student loan debt.
Year 1 and 2 – do a local, state school, or community college to keep costs down and get your 101 math and English classes. Little to no housing costs while living with a parent.
Year 3 and 4 – buy a rental house with your parents near the school. Maybe this costs $8,000 down for an $80,000 house at 4% interest and your son and 3 of his friends are going to live there. The three friends pay rent, you have a property manager, an official lease, and these kids pay the mortgage on this place plus subsidize some of the food/school costs. You can now borrow the max with federal student loans. You are handy with your hands and can do repairs to the house because you learned all about it in high school.
You activated your savings from above to invest in one of the 3 asset classes. You used $4,000 and your parents used $4,000 to co-sign with you. You have $11,000 liquid to help with repairs or fix up things, build a deck, etc.
At 18, you got your first credit card. You learn that any balance that is on that card MUST be paid for at the end of the month. Period. Use it in emergencies. This will be important to getting a loan later on and demonstrating responsibility with credit. Teaching responsible usage of this is paramount to any financial education.
Education: Ideally, I’d want for you to get a business or accounting major with a STEM major like engineering, information systems, etc. Those who know money run the world. Maybe a business minor. Maybe the business degree would give you enough with the economics, marketing, etc. Maybe you really like to build things and engineering is up your alley.
Post college – Years 5, 6, 7, and 8. From the age of 22-26, you probably still have roommates living with you – or maybe you move back home and continue to rent this out. You now have a job, but these roommates are still paying rent. ALL of the money received for rent over these 6 years is going towards the principle of the house. Maybe it’s paid off in 6 years???
With those 4 years, you have your home paid for. You go and get a newer car when you graduate college and get your first official car loan. You just got 7 years out of your beater. You go and buy a 3 year old car with low mileage. Maybe a $15,000-$20,000 car over 5 years and you pay cash for it. You do NOT buy a new car. A 3 year old car essentially is half of the cost of a brand new car, and someone else just paid the privilege of owning it new.
While you are now making $60,000 – let’s now look at your expenses.
Car – $100 per month for insurance/gas. No car payment.
House – $0 (paid for by roommates or you live at home)
Food – $250 per month
Student loans – owe $30,000 over 30 years, about $100 per month.
Clothing – $200
Utilities/phone/cable/internet – $300 per month
All in all, your basic necessities are about $1,000 per month. You are making $60,000 per year, so after taxes, you are maybe bringing in $3500 per month. Maybe half of this is going into savings every month. Let’s do $1500 savings and allow $2,000 for expenses. Those expenses will include x amount of dollars for furniture, vacation fund, etc. Those items I THOUGHT should be taken out of savings should actually, for me, be budgeted out of checking.
You build your cash position from $900 to $6000 to cover your basics for 6 months. You start out of college as an engineer because you like to build things. But you also have a business degree and own a rental property that you know how to maintain.
For 4 years, you have free housing. That $1,500 every month starts working for YOU.
Of that $1,500 – you will be actively investing it. Unlike a cash position, this won’t just sit there. You want this making money for you. So let’s do this….
- $900 towards real estate
- $400 towards stocks
- $200 towards precious metals
This is an example, but watch what happens.
At the age of 22, 1 full year out of college, you now have saved $9,600 towards real estate. You have $4800 in stocks and $2,400 in gold and silver. You take that $9,600 and put that as down money on a house to rent. You spend some weekends working on it and fixing it up. You owe $800 per month on this and rent it out for $1300. Any proceeds from this you are putting into an account to pay for expenses.
At the age of 23, same deal. Buy another house. You just saved another $9,600 towards real estate and another $4,800 in stocks.
Same for age of 24.
Same for age of 25.
At the age of 26, you and your college sweetheart are thinking of marriage!!
At this point, you now have:
5 houses. Each one of these is fully rented out and the house that you have been living in, you are now vacating and renting out. Each one of these houses is generating, on average, +$500 per month. Over the course of 4 years, these houses have an account worth:
House 1 – you lived in – $12,000 for last 2 years of college + $24,000 for last 4 years = $36,000
House 2 – 4 years * $6,000 = $24,000
House 3 – 3 years * $6,000 = $18,000
House 4 – 2 years * $6,000 = $12,000
House 5 – 1 year * $6,000 = $6,000
Total bank account from houses = $60,000 (repairs and taxes may take this down a LOT)
Total stocks = $19,200
Total metals = $9,600
The young adult years – marriage and children
So – at 26 years old, you’re looking at a portfolio of maybe $80,000 with $30,000 per year coming in from rental properties. The monthly expenses, you now share with your wife so things like mortgages on bigger houses should be split and not really be more than what you are paying now. Utilities are split. Food costs are split.
Marry your sweetheart. Use a year of rental property money to pay for the wedding, and another year of the rental property money to pay for a down payment of 10% on a $300,000 house. So – between the two of you, maybe you bring in $100,000-$160,000 per year. This is more than enough to live a nice life with.
The $300,000 house – if I had to do it over again, I’d get a house on land with trees and a nice patch to garden. In case of worst case scenarios, you should be able to garden on your property, have chickens, perhaps goats and maybe even pigs. I know this sounds extreme, but if times get really tough for everyone, you need to be able to live off of your land. You cannot do that living in a suburban development. Maybe this “starter house” is a split level but has 10 acres. You spend time fixing it up, building out the basement.
At age 28…..you now use that rental property money every year to re-invest:
$30,000 per year….
$10,000 down payment on another house
$15,000 towards stocks
$5,000 towards precious metals like silver and gold.
What you now see is this money is like spreading seeds all over an increasingly large garden. Your stocks should grow over time. At times, precious metals may shoot the moon. Use some of that money to buy more houses. When stocks shit the bed, maybe sell one of your lower performing houses to buy low priced stocks that will increase over time.
10 years into this, in theory….you could have:
15 houses generating $7,500 per month
$100,000 in stocks
$50,000 in precious metals
$20,000 in cash for emergencies.
With that kind of income, just from the real estate, what you could do is use that income every single month or two and buy 6 houses per year. Another 10 years out, and you could potentially have 75 houses.
All of this from making $60,000 per year out of college and knowing how to work with your hands and where to put your money. At times, the housing market may crash and metals may be very high. Convert metals to buy houses. Maybe at other times metals are in the gutter and stocks are over valued. Sell some stocks to buy cheap metals.
The idea is to take money from over valued asset classes and convert it to under valued asset classes. Keep cash on hand as an emergency. Stocks you can sell if need be, but these should increase over time.
If my boy wanted to, he could retire at 48. His son or daughter would probably be 18 and ready to go off to college themselves. With 75 houses at $500 per month, you are looking at an income of $37,500 per month.
If you really think about it – he could have retired much, much, much younger and used that income to fund an empire. The entrepreneurship classes help you understand leverage, finance, and business structures. The business classes help you form an LLC and understand how to do the books and understand basics of business laws.
This is just one example. Some thoughts with this:
- Maybe you only acquire new properties at half or a quarter of the rate and you use some of those earnings to pay cash for a new car or buy a house outright?
- As time goes on, more and more of these houses can get paid off meaning you have no mortgage payment on them, only income and property taxes.
- Maybe you diversify into owning a pizza shop with a buddy or investing in a local dog grooming company. Maybe you have a business that has a portfolio of investments, but the real estate generates a lot of the start up capital?
- Maybe you decide to franchise your pizza shops regionally? Having base sources of constant revenue streams helps you organically grow rather than building out businesses with leverage.
The big concepts to understand here are:
- Avoid any and all run ins with the law. No fist fights. No bar brawls. No drugs. Ethics are not a suggestion, it’s a way of life. All of your business dealings must be legal, ethical, and fair. Never try and take advantage of someone. Find good deals, but be fair. If a deal is too good to be true. It is. No one on the planet is out to make you a better person but you. If someone is pushing a deal too sweet, don’t walk the other way, run. There’s always a catch, and you can’t believe a word out of most peoples’ mouths because they are not as ethical as you are.
- Master the concepts of “wants versus needs”. You may WANT a giant house, but if you cannot afford it, rent a 2 BR house and let your investments do the work for you. Someday, you will WANT the big house and have the checkbook to buy it.
- Patience and planning are the mother of all strategies. Timing, solvency, and leverage are the execution of tactics. Neither can work without the other.
- Any partnership that you can enter into, you need to build in an exit strategy. Partnerships all start off great, but many can end poorly. As part of your business plan, ensure there is a way to dissolve a partnership well before the ink is dry. Therefore, if an impasse is met, the parties have an agreed upon way of parting prior to involving any outside entities for moderation.
- Do NOT over-extend yourself financially. The garden you are building out and planting seeds in will grow and grow. You must harvest occasionally, and pull weeds where necessary.
- When you put money into savings, have it generate profit for you by using asset classes to move value around strategically.
- Always have 3-6 month worth of cash for emergencies. You can liquidate stocks rather easily and they grow a lot more than cash. So cash more than 3-6 months worth of expenses can do well in the stock market and is very liquid.
- “Big money goes towards big companies, medium money to mid sized companies, and small amounts of money go toward speculative assets” This is a rule for investing – so maybe your big money goes to a Pfizer or GM in the stock market but maybe you have a few hundred dollars on a junior minor.
- Understand how to live on a budget where a large portion of your income is diverted towards accounts that are seeds that will bear fruit for generations to come. As you grow older, you can slightly reduce the amount you are putting in savings, and the revenue your savings generates will start to increase more and more. Think of a watermelon. You can cut it up in a week and eat it, or you can take out all of the seeds and plant it everywhere and have hundreds of watermelons come up over months. When you are 22, your friends may outspend you on buying a house they cannot afford or a fancy car that will bankrupt them. You will be executing a plan that could allow you to retire at 35.
- Do not overspend for cars. They are depreciating assets and means of transportation. If you are sitting on a few mil in cash and want to buy a toy car, go for it. If you’re 23, don’t get in to a $800 per month car payment for 7 years to try to impress friends or girls. No one gives a shit. It’s just wasted money. Get a pick up truck. I wish I had. Not only is it great for hauling things, but it can help you so much with getting materials to fix houses up with and moving heavy equipment/furniture.
- Do NOT overspend for college, unless you plan on being a doctor. Half of college you can get just as easily at a community college and living at home, at fractions of fractions of the cost. If you want to have a 4 year degree that says “penn state”, no one cares where you went the first 2 years. Not one soul on this planet.
- College dropout rates are a real thing. Avoid this completely. If you make a commitment to finish something, do it. You can speed this up by using your AP classes in high school to get some credit. You can also take summer classes to speed this along. Therefore, you could get a 4 year degree in 2.5-3 years.
- Building relationships – whether it is family, close friends, acquaintances, or work friends – understand the value of relationships. This is the fabric of who you are and will dictate 90% of your social interactions for the rest of your life. You may need help someday. These people can help you. You may be in the position to help them. Offer it. NEVER burn bridges. Be polite to people, but do not be walked on. As they say, speak softly, but carry a big stick. At all times, avoid raising your voice to another. It only shows you are not in control of your emotions. We are all human and vent. But as a general rule, stay calm, and those around you may be calm.
- Surround yourself today with those who you want to be in 5 years. Their habits will rub off on you. Seek out friends with those who have similar interests to you. Learn from them. Everything you can.
- Learn to work with your hands. Fixing up houses. Landscaping. Cars. Electrical work. Drywall. Painting. Mowing the lawn. Boy scouts. Gardening. Hunting. Fishing. All of these skills may help you someday.
- Get educated with how money works. You need to understand future value of money. Leverage. Financing. Checking accounts. Inflation. Economics. Marketing. Accounting. Entrepreneurship. Business law. Maybe you go for an MBA or the like at 26?
- As you get older, your risk appetite should decrease. You may be putting more money when you’re older into precious metals and low risk stocks. When you are younger, you may be putting more money into real estate and higher risk stocks.
- When possible when you are younger, live at home, have roommates, buy properties and rent out. Housing costs will always be the largest expense you have, so if you can delay this or reduce this cost, by all means, try and do this.
- A car is a depreciating asset. Never buy a new car until you are in your mid 30s – and I only do this because I have a 90 minute commute each way and cannot have a car that falls apart. If you don’t have a 90 minute commute, buy cars that are 3 years old with low mileage for cash and hold on to them for 5-6 years. Someone else is paying for the first half of the value of your car with this method. IF you buy a new car, try to hold on to it for 8-10 years. The time to get a new car is when your yearly repair bills start to exceed what a monthly cost would be for a newer car. If the car is worth $4,000 and they advise you need a new engine for $3,000 – it’s time to get a newer car.
- Move money between asset classes. Gold and silver have periods of time where they are worth a lot against the stock market, and other times they are over valued. Understand the concepts of buying value, not price.
- Always hustle when you are young and don’t have a family. Work a 40 hour week? OK – mow lawns on the side. Deliver pizza on the side. Fix up homes on the side. Sell houses on the side. These side hustles significantly help you grow the garden you are planting seeds in.
Understand your big goals. Work extremely hard between 16 and 36 and you can enjoy the next 50-60 years of your life worry-free while passing down assets that can build generations worth of wealth, if done correctly.