Making Your Money Work Harder
Updated: Jan 22, 2020
By: Kevin Boland, Executive Vice President
A decade or more ago, I was looking for an easy read book about investing to try and stimulate some interest in the subject with my kids. I settled on Rich Dad, Poor Dad a book by Robert Kiyosaki. It was not so much about investing as it was about making your money work hard for you so you don’t have to. It was a book I wish I had read when I got out of college. There were a couple lessons I might not have had to learn the hard way. Several of my kids read the book and have developed different levels of interest in investing. As they’ve grown and entered the workforce, we’ve discussed decisions on insurance options, retirement savings opportunities, health insurance, other benefit options and investments.
Fay and I have eight children, so I feel like I have been having the same conversation every few years for several decades. In that time, I have learned there is some basic background information that I find it helpful to discuss early on and periodically reinforce. We review the characteristics of basic asset classes – cash, bonds, stocks and hard assets – their relative long-term returns and their volatility – how much of a roller coaster ride does the investment provide. Cash has a low principal risk and low volatility. Bonds have more principal risk and volatility than cash but less of each than stocks, which have the greatest principal risk and volatility. However, there are other risks, interest rate and inflation among them, that are impacted by the investor’s time horizon. Understanding the relationship between risks and rewards is important and one of those messages that requires
The time horizon for investments affects what investments are necessary to achieve your objectives. For someone just starting out, it’s important to save some emergency funds or have access to some – the rainy day fund. A former boss suggested to me that the rainy day fund ought to be one month of earnings for every $10,000 in salary. So an emergency fund for someone earning $30,000 might be $7,500; for someone earning $120,000, it might be $120,000. The underlying theory being that the more you make the longer it will take to
find comparable employment if you lose your job. I’ve used that as a rule of thumb and have encouraged my kids to consider it in their planning. You won’t necessarily be able to build that emergency fund immediately, but it’s a useful target. How much it needs to be will depend on the individual’s financial commitments, access to credit, living arrangements and other factors. It will be greater for someone with student loans, a mortgage and dependents, than for someone single, living at home with access to the Bank of Momanddad. Emergency funds need to be highly liquid and safe. You want the ride to be more like a carousel than a roller coaster.
As they’ve found Mr. or Ms. Right, intermediate term saving becomes more important – weddings, houses, etc. You can take a bit more risk with these investments in exchange for an increase in the possible reward. This ride is a bit bumpier than the carousel but the peaks
aren’t too high and the valleys aren’t too deep.
All of my working children have been fortunate to work for employers that have a 401(K) retirement plan, and that prompts a discussion of whether and what to invest for retirement. Time is a critical ally for retirement investing and that favors stocks. An employer match enhances this return and I encourage them to invest enough to earn the maximum. A ROTH 401(K) option further enhances the long term potential of retirement investing for younger employees paying low or no income taxes.
Have a discussion with your children about investing as they enter the workforce. It’s a time investment that can pay big dividends for your children. If you want assistance with that discussion, make an appointment to see us this summer.