When our daughter was born nearly two years ago words cannot describe the feeling of joy I felt. It was one of the most magnificent moments in my entire life. After taking it all in I noticed another amazing thing, my wife and I were instantly able to relate to millions of other parents around the world!
As a parent it goes without saying that we want to give our children the absolute best! So much so that in some cases it can be detrimental to their development. In my case I use to make a mad dash into my daughter’s room every time she started to cry. My wife would reference all these books and websites she read saying she needs to learn to sooth herself at night. I would scoff and tell her that our daughter needed to be held and rocked to sleep. Unfortunately this type of “nourishment” couldn’t be sustained as it turns out my body needs more than 4.5 hours of sleep a night. Eventually we had to let her “Cry It Out” and it just might have been one of the worst nights I’ve ever experienced.
My daughter was born in June and although Christmas was 6 months away it arrived a lot quicker than we imagined. Before the holiday arrived my parents approached us and told us that they wanted to start a savings fund for our daughter. It wouldn’t be anything crazy like a trust fund but something that they thought would be the perfect gift. They would contribute to the fund on birthdays and holidays instead of showering her with tons of material gifts. I was taken back, this was one of the few serious conversations I had about money with my parents. Unfortunately money was taboo in my household when I was a child.
I applauded my parents gesture whole heartedly but asked them to humor me while I made another suggestion. I explained to them that their idea was very well intended and appreciated but contained one big flaw. I told them that the unfortunate truth is the value of the U.S. dollar has declined significantly over time and because of that the money they would deposit in this proposed savings account would erode over time. Basically, the dollar amount in the account would stay the same but the purchasing power would diminish.
To give them a point of reference I asked them how much a pack of gum was when they were kids in which they responded some ridiculous value, I believe it was something like a nickel, where as now a pack of gum will run you $1.19, I could start to see light bulbs going off in their heads. The second thing I did was show them a U.S. Inflation calculator. I can’t remember what the numbers were at the time that I showed them an example. But if I were to show them another example today I would show them if an item cost $1,000 in 1998 (15 years ago) that today in 2013 that same item would cost, $1,408. That’s approximately a 40% increase in price which is ultimately a 40% decrease in the purchasing power a dollar.
I have to admit, it’s a great feeling to see your point understood and driven home =)
By this point in the conversation my parents were on the edge of their seats and wanted to know what the better alternative was. I was happy to oblige. In short I gave my parents a quick 10 minute speech on what a stock really was, why you should invest in them, and the mechanics of dividend investing.
The circle was now complete. My parents, wife and I now agreed that instead of simply depositing money into a savings account for my daughter we would open up a brokerage account instead. Every holiday, birthday, report card, etc when my parents want to give her money they can deposit money and I will use that money to purchase Dividend Kings that are trading at a discount to their true value.
Let’s take a look at how the strategy of buying stocks as a gift would have turned out 15 years ago:
Since 1998 the price of Coca Cola (KO) has gone from $26 to $37.50 (44% increase) and paid $16.77 in dividends. Not bad! =)
Since 1998 the price of McDonalds (MCD) has gone from $20 to $96 (380% increase!) and paid $16.49 in dividends. How’s that for maintaining your purchasing power?!
Since 1998 the price of Johnson & Johnson (JNJ) has gone from $25 to $74 (196% increase) and paid $20 in dividends. Look at that wealth generation!
This money may be used to purchase our daughter her first car, attend college, or even put a substantial down payment on her first home. We honestly don’t know what it will be used for but this is a gift that keeps on giving!
Do your children constantly get showered with things from their grandparents? Do your parents or in laws have an account set up for your children?
Brick By Brick Investing and other bloggers are participating in a giveaway of $100 to one lucky winner! The contest runs through February 15th. If you win the $100 consider purchasing a couple shares of my Dividend Kings or splurge on your significant other for Valentines Day! Check out the Rafflecopter widget below for details on how to enter. Good luck!
Here’s to our Wealth!
February 4, 2013 at 11:55 am
Good post Marvin! We’ve just started to do this for all of our kids with money they get. We just have so much crap that they don’t need any more stuff. Now our parents send money for the most part and we split it in half for for activities like swimming lessons and the other to invest in some solid dividend paying stocks for them.
February 5, 2013 at 2:58 pm
I love your plan John. Kids can pretty much entertain themselves without material things so it’s better to put that money towards something that will help them later in life.
February 4, 2013 at 1:18 pm
I like this idea but here is a word of caution. When they turn 18 they will have full control of that account (assuming it is a custodial account). The value in that account will also count against them for financial aid for college (middle class problems I know). You could also get hit with the kiddie tax as the account grows.
Of course all this things most people would consider to be “good” problems and if you teach your kids financial literacy you shouldn’t have to worry about them blowing through the money when they turn 18.
February 5, 2013 at 2:59 pm
Great points Brian, but like you pointed out, these are good problems! =)
February 4, 2013 at 5:52 pm
I think this is a wonderful idea and you can use it as a great tool for teaching your children all about stock investing and financial responsibility. By getting started early, your kids will be thanking you plenty when they are ready to head off to college, purchase their first home or just have these stocks forever throwing off passive dividend income and being a great financial foundation for the rest of their lives!
February 5, 2013 at 3:01 pm
I agree Dan. I will use this account to teach my children about investing and allow them to ultimately take it over around age 13-15 depending on how fast they mature financially.
February 5, 2013 at 8:02 am
Excellent points! Though not as successful, I’ve also tried to convince others to invest in our kids future rather than buying them ANOTHER toy. I do have mutual funds setup for both our kids in addition to 529 plans. I want to give them every advantage (in this case financially) by the time they are adults.
February 5, 2013 at 3:03 pm
Starting now is half the battle. Over time your investment knowledge will grow and you should start to see some nice returns =) Your kids will thank you tremendously years from now I’m sure.
February 5, 2013 at 8:36 pm
Marvin, you have a good investment and planning strategy for your daughter! My in-laws parents are not fun of giving toys or material things to our kids. My wife and I decided not purchase more toys for them, what matter to us is their education and to contribute education plan funds.
February 6, 2013 at 11:16 am
Thank you. I couldn’t agree more. To date our daughter has not played with a toy consistently for over 3 weeks.
February 5, 2013 at 8:57 pm
That is awesome. If you can couple that with teaching your daughter the value of aggressive savings, with the savings going to additional dividend paying stocks, she’ll be well on her way to achieving financial independence.
Bravo to you good sir.
February 6, 2013 at 11:19 am
Thanks! Ideally I would like my children to have the option to pursue whatever career they have a passion for without having to consider the compensation they will be receiving. I have seen people miserable with their full time job and when I ask them why they continue to work they typically say something along the lines that it pays the bills.
February 8, 2013 at 9:40 pm
Marvin, what a great idea! I remember clearly the night I had to let our oldest (now 13) cry herself to sleep for the first time, it was the worst! And let me tell you, the time flies by. I think as your years fly by with your little one, you’ll be really glad you set her account up this way. And she will too.