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CNN Live Saturday
Dollar Signs: Saving For Our Children's Future
Aired August 02, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDERICKA WHITFIELD: Welcome to "Dollar Signs,". One of the most exciting things can can happen to a family is having a baby. While proud parents are happy to show off that new bundle of joy, they may forget they need to start saving for college now. CNN financial correspondent Ali Velshi looks at investing for your kids' education.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL CORRESPONDENT: Oh, baby. Proud new parents Ashok and Michelle Nachnani are too busy with Noemi's hourly needs to think too far ahead. After all, little Noemi's first day in college is still more than 6,000 sleeps away.
ASHOK NACHNANI, NEW FATHER: It's a bit of a concern just, you know, you try to work out the numbers and just managing your household budget, you try to figure out exactly how much is left over and what you'll be able to actually put away for education in it. It becomes a bit challenging, a little bit stressful.
VELSHI: But is there a solid plan to turn this little girl into a graduate someday?
NACHNANI: I guess our plan initially is just been save the money and try to find a decent place to invest it and then when the time comes, we'll just draw from that to pay for whatever expenses we have.
VELSHI: And those expenses are staggering. Tuition, room and board are rising on average at a rate of 5 percent annually. If Noemi attends a public college in her own state at about $23,000 a year, they'll have to put away $2,839 a year starting right now. And it will have to earn 6 percent each year. What if she wants a fancier education?
SIDNEY KESS, ACCOUNTANT AND LAWYER: Children also have no idea. They all want to go out of town. They want to go to a private school and it's become a ritual in many middle-class families for the parents to go shopping around and visiting different colleges and looking at the campuses. But no one really takes stock of the realities of paying those bills.
NACHNANI: I don't have Ivy League envy or anything, so I don't need to spend $100,000 a year for that education.
VELSHI: Well, maybe not $100, but it might be 60 grand a year at an Ivy League school by the time little Noemi is a freshman, that's a quarter of a million dollars for an undergrad degree. To cover that completely, Nashok and Michelle have to save $7,361 per year. How do parents save this kind of money?
UNIDENTIFIED MALE: Not everybody's going to be able to retire comfortably and pay for four solid years of a child's education.
VELSHI: Make your child's college education as much of a priority as saving for retirement and buying a home. Also, contribute to college savings plans and tax shelters like the 529 plan.
DOUG FLYNN, FLYNN/ZITO: If you can't fully save 100 percent, shoot for at first for 25 percent. The worst thing that happens is at least you know you've got one solid year of that child's education saved.
VELSHI: And start saving early, as soon as your future graduate is born. If you plan when your baby is in one of these -- you'll be in good shape when she needs one of these. And just in case, Ashok and taking out some added insurance.
NACHNANI: Yes. I mean, started buying lottery tickets every day.
(END VIDEOTAPE)
VELSHI: Here's the thing, Fredericka. We're talking about a quarter of a million dollars for the best education 18 years down the rode, four years of an Ivy League education, undergraduate. Ther are some estimates it may cost up to a quarter million dollars to take your child from birth to the age of 18, and then you've got to look at your own retirement situation.
So we're looking at a lot of money before anybody even thinks of just putting money into a bank account so their kid might be able to spend it later in life. These numbers are staggering, you've got to adjust your financial plan when you have kids -- Federicka.
WHITFIELD: Staggering and depressing, Ali. We're going to talk more about this. We'll be having you back in a moment. But for now, saving for your kids is great. But teaching them to save and invest in the future are also important life lessons. And it's not as difficult to do as you just might think.
Oh, yes? well, co-host of the "Motley Fool" radio show, David Gardner, is live in Washington with tips that anybody could use. Good to see you, David.
DAVID GARDNER, HOST "MOTLEY FOOL": Hi there, Fredericka.
WHITFIELD: Well, it's really easy to teach a kid. Maybe you don't have to teach a kid how to spend money, they get allowance, paycheck, if they're a teenager, they can't wait to spend it. How in the world do you start encouraging them to save?
GARDNER: Well, I think it really is a team effort. Having just watched that segment along with you, I think one thing that we all have to remember is that we need to work with our kids together. I mean, a lot of kids do help out with their own college education. So I think the anxiety bar was raised a little too high by what we just saw because it makes it sound as if it's all on us. The truth is that a lot of kids help themselves put themselves through college. And you know what helps a lot to get them to think that way?
WHITFIELD: What?
GARDNER: By making a team effort with them as they're growing up. It's just what our dad did for my brother and me, teaching us about the stock market, starting an account for us at birth, and setting us up. And I think it was great to see a really young couple there in the sketch you threw out there because if you start when the child is that young, you give yourself about two decades worth to compound that money that you're saving. So those are a couple things that I initially think about when I watch what we just watch.
WHITFIELD: You talked about how your dad got and you your brother into investing. Let's talk about some other lessons or other ways to convey the lessons to kids about saving money, not spending it. Credit cards always end up being enticing to a lot of young people when they start making money. How do you really impose on these kids that credit cards really may not be the way to go? To get there their, you know, financial dealings started?
GARDNER: It's funny. When you put it that way, Fredericka, it's funny because obviously so many adults have problems with credit cards.
WHITFIELD: That's true.
GARDNER: For starters, you really have to be a little numerical. We're not talking about advanced math. We're talking about fifth grade math. Just look at the percentage that you're having to pay on an average credit card today. If you don't pay it off by the end of the month, it's about 15 percent.
Once you learn another number, and teach your kids this, too, that the stock market historically rises about 10 percent, you'll see that borrowing off the credit card, you will never make that back up. So all of us need to start with ourselves, and the example we set for our kids by getting out of debt in the first place, but also teach they're they're conveniences, but if you end up not paying off your balance, you're putting yourself in a hole.
WHITFIELD: Wow, so forget the credit cards, you don't want to make payments to the credit cards. Instead, maybe, if you're going to make payments, make payments to yourself.
GARDNER: Yes, that's a wonderful tip. I think a lot of us are practicing this pretty well these days. I think financial education is so much better than it was 15 years ago. If you are paying yourself first that means you're putting away money for retirement or putting away money for you child's 529 college plan, which we can talk about. That's a very effective way to set yourself up and avoid the temptation not to do that stuff.
Human nature is always telling us to spend now. But if instead we discipline ourselves and set it up so we don't even notice that that $100 or $200 was deducted from our paycheck to pay for our kids' college or to pay for our retirement, we really set ourselves up in a much better place.
WHITFIELD: All right, David. Well, as promised, we want to make this a real team effort here in trying to help get our kids on track financially. So Ali Velshi is back with us. Ali, we've also got a phone call to help motivate this conversation with some questions and comments.
Lee from Dallas is our first one on the line. Lee, what's your question or comment?
CALLER: Hi. How are you doing today? I just have a brand new baby. And I was looking around for a 529 for her college fund. And what kind of advice can I get from y'all as to how much I should put in each month?
GARDNER: Well, I think first of all, and I'll take it to Ali shortly, but I just think that anybody whose looking at 529 plans should definitely look at the Internet because so many of us are using it today, and that's really the best and most meaningful way you can look over the whole country. Every state has a 529 plan. And each of us, whether we're in Texas or Maine, we can invest in any state's 529 plan. The only way you can meaningfully and look through, savingforcollege.com is a good site to help you do that.
VELSHI: That's exactly what I was going to say. The advantages to investing in your own state will depend on what advantages your state offers you in terms of tax deduction. Check that first. Get on the Internet.
You have to plan your 529 the way you would plan your retirement savings. There are calculators. It will tell you how much you're likely to need. You have to make decisions about whether you're thinking of financing a state education or a private education. But that's all available, readily available on the Internet.
WHITFIELD: All right, guys, hold tight for a second. We're going to take a short break. More with Ali Velshi and our "Motley Fool" David Gardner coming up next.
And of course you can still e-mail "Dollar Signs" at cnn.com or you can call us at 1-800-807-2620. We'll be right back with your questions.
(COMMERCIAL BREAK)
WHITEFIELD: Welcome back to "Dollar Signs." We're talking about investing and your kids. Co-host of the "Motley Fool" radio show, David Gardner is with us from Washington and our own financial correspondent, Ali Velshi, is in New York.
You guys, we want to leave off where we left off. Now we're inspired by an e-mail coming from Max asking "when is it, perhaps, too early -- if it is ever too early, to start a retirement account? Starting a retirement fund at 16. Any advice?" that from Max?
VELSHI: Yes, Max, give me some advice.
GARDNER: Great to see Max is already thinking about it at that early age. IRA's can be opened by kids, their parents on behalf of kids, if the child has earned income. So if Max has a summer job and he's able to make 2,000 bucks, he can start opening up his own IRA at this age with his parents' help.
I would suggest the Roth IRA is a wonderful option for someone like Max, and also I think Max should try to max out the amount that he's putting in, put away $2,000, if you can. Parents, we can help our kids out a little on this, paying for their way through their teenage years and allowing them to save most of what they're making in summer right through the bottom line. I would also take a hard look at the stock market for that Roth IRA, Max.
WHITFIELD: Ali?
VELSHI: That's exactly where I was going with this. Even if he doesn't qualify for an IRA, Max is young enough to have a good risk tolerance. He's got a lot of years ahead of him. He can take advantage of a diversified stock portfolio by buying into a mutual fund with lots stuff available to him.
By the time if he has earned income, if he doesn't have it now, he'll have generated enough money to be able to max out his tax- sheltered investments by the time he starts working. It's actually a great plan, Max. There's no such thing as too early to start planning.
WHITFIELD: Even for the Roths now, isn't it now $3,000 that they can contribute?
GARDNER: That's right.
WHITFIELD: That's the new rule.
OK. Ronnie from Atlanta is on the telephone with a question or comment. Ronnie, what you got?
CALLER: Hi, guys, I just have a question about gifting money to your children. I know you're allowed to gift $11,000 a year. Does the child pay any taxes it?
GARDNER: No. That gift is -- that's a free gift, and you can do it -- if you have two parents in the family, you can each do it. So you can really stack up money in a kid's account. And I think we've been been pretty good at emphasizing the importance of doing that early.
One statistic that might be helpful to think about Ronnie, $1,000 invested at a child's birth, in 65 years, if you just leave it in a stock market index fund and look at historic levels, that will be $1 million at the age of 65. Now, that's not saving for college, that's a gift for the child's life. But, you know, the child will be making other money, too, but it would be awfully nice to think that 65 years from now you'd have $1 million just based on $1,000 patiently invested early.
WHITFIELD: Wow. Ali, anything to add to that?
VELSHI: Yes, the idea of gifting is actually something a lot of people wait too long to think about. It's a major tax advantage to be able to give the $11,000 per year or $22,000 if you're a married couple. Really needs to be thought of early on because what it does is it leaves you wotj less when you pass on for your estate to be taxed on.
WHITFIELD: All right. Here's another e-mail. This one coming from Martha. "I didn't know I would legally be required to give my son the money from the UGMA account at age 18, can I put this in some kind of vehicle with minimal or no penalties so I don't have to hand the kid thousands of dollars at 18."
GARDNER: Well, well, well. You know, the answer is, unfortunately, Martha, no. And frankly, I'm glad that that acronym came up, UGMA stands for the Uniform Gift to Minors Act. And we talked about saving for kids today and putting away money, but we haven't maybe been hands on about how you do that.
You just go to a brokerage firm, open up an account and register it under the Uniform Gift to Minors Act, UGMA, in some states UTMA, Uniform Transfer to Minors Act. What it means is the money you put away for that child will be that child's when that child comes of age, is no longer a minor. In some states, 18, other states 21.
That means for Martha in Florida, her son or daughter will get that money. I'll say, as a beneficiary of that act myself, when I turned 18, I was very grateful. I misspent some of it, but my parents had made some good decisions and helped me along the way teaching me about saving and investing in stocks. So that's something you could do, Martha.
WHITFIELD: Wow. Okay. Go ahead, Ali.
VELSHI: When we're talking about college savings plans, they're excellent vehicles, tax sheltered vehicles, but when you look at something like the 529, you're leting that money grow tax-deferred, tax -- where you're not going to be paying tax on it if you don't have the income to generate tax on it, but if your kid gets to the age where they're supposed to be using that tax for college and decide they want to be a rock star instead, you lose the benefit of putting that money -- the Nachnani's in the piece I did, were talking about not knowing where to put the money and keeping it in a general fund and then drawing upon it as they needed it later.
You're not sure how your child is going to exercise the money you put aside for education, you have to be careful where you put it. You could end up paying more penalties than you save.
WHITFIELD: All right guy, and david, you alluded to it a moment ago, how your parents taught you the principles of budgeting early. We're going to talk a little more about the word budget and why some families seem to think that's a dirty word. Well, it's not. We're going to attack that issue when we come right back right after this break.
(COMMERCIAL BREAK)
WHITFIELD: Welcome back to "Dollar Signs." We're taking your e- mails and calls today to help you teach your kids about the value of a buck and ways you can help them invest.
David Gardner is with us from Washington, and Ali Velshi is in New York. And guys, we were talking about budgets. And family budgeting a little bit before the break. And David, let's talk about why budget is not a dirty word. Why should kids learn to embrace it early?
GARDNER: Well, I think that we as parents don't really have much experience doing it ourselves. And it's just about the last thing most of us want to do. So it's hard to get our kids really thinking about that, but the fact is, once you start budgeting, you actually know where your money is. You can, as it says on the screen, pay yourself and pay your bills. You've thought about it ahead of time, and then you have -- you know exactly how much you can save left off after that.
And I think in particular, it's great for your kids to start insenting them. That means, start rewarding them for saving themselves. And that's a big thing that a point we make all the time on the "Motley Fool." A lot of our members do this. You actually just say son, daughter, if you put away a dollar, I'll put away $3 for every dollar you put away, as an example. It's a great way to get kids thinking, budgeting saving.
WHITFIELD: Wow, that's good incentive. Well, Mike in Las Vegas is on the telephone. Perhaps he has soem ideas, or maybe has a question. Mike, what you got?
CALLER: Yes, thanks for taking my call. I'm just working with a company that's been on the books for about 31 years. And they're out of Oklahoma called Prepaid Legal. And I'm curious, they have a stock program built into the company. How much of my investment portfolio from the earnings of the company should I realistically spend in reinvesting back in my own company for my own retirement program?
GARDNER: That's a great question. For those who did it at Enron, it cost them dearly. For those who've done it at Coca-cola over the years, many of them are millionaires. So I think a good rule of thumb here is to think about, if you really believe in your company, first of all, you're going to have a much better sense of the value of Prepaid Legal, the people you're working with, the sense you get of whether or not you're creating something great together here over the next decade. If you love your company I can see putting about half, up to half in my employee retirement account, you know, toward -- often you'll get a discounted stock you can buy. So I would think of it that way.
I would also maintain at least half outside invested in an index fund or something else that you understand.
WHITFIELD: And Ali, I'm going to have you attack our next e- mail.
VELSHI: Okay.
WHITFIELD: If you will in a moment. This from Terry in Ohio. Terry is asking "Is it preferrable to buy your newborn child a rental property, such as a duplex and take advantage of the real estate tax and appreciation benefits rather than investing in the stock market?"
VELSHI: That's an interesting question.
WHITFIELD: No kidding.
VELSHI: It's only preferable if you happen to prefer that form of investment. It would be the same reason it would be preferrable for you to invest in a rental duplex as opposed to the stock market.
If you understand the property market and you have an income situation which allows you to take advantage of the tax benefits of having real estate and particularly of having a mortgage you, in many cases, can beat the market average that we were talking about earlier of 10 to 12 percent over time.
If you don't know anything about real estate and you're not in a position to take advantage of tax write offs by owning real estate, then no, it's probably better to have your money in a diversified portfolio. If you're making that decision on behalf of your child, you have to make that exactly the same way you would make it for yourself.
The advantage of time and appreciation in real estate is not going to be a major consideration in this discussion because your child has a long time horizon, whether it's in real estate or the market. I think you'd have to make that choice.
Do you know anything about real estate? Are you interested in being a landlord? if you do, you can probably do better than the market. If you don't, you'll find it frustrating.
WHITFIELD: And david, if you could chime in as well.
GARDNER: Sure. There's a lovely phrase on the screen a minute ago, the magic of compounding. That really refers to putting little amounts of money away early and letting that grow over time. A good example, Fredericka, I gave earlier, one we talk about all the time at the "Motley Fool", $1,000 at a child's birth enjoying the market's average of 10 per year, by the time that child is 65 -- you didn't add anything else, just that initial $1,000 -- right about $1 million.
That's the magic of compounding, small amounts believe to greater amounts over time. I do want to emphasize, we want talked enough about it probably enough this afternoon, the importance of the stock market. We've all lived through 2000, 2002, we know the stock market can go down. Most of the time it goes up. Especially when you're thinking about your child and looking over the long term, you should be invested in at least the index fund, if not some individual stocks too.
Our kids often lead us to the best companies because they're buying great stuff out there. Video games, these day, Electronic Arts is a great stock.
WHITFIELD: Invest in what they like.
GARDNER: Listen to your kids. Get them thinking about it.
WHITFIELD: David Gardner of "Motley Fools" and "Ali Velshi" of our CNN financial network. Thanks very much to both of you, appreciate it.
And, of course, the bottom line to these kids out there, and this from fool.com, don't keep up with the Joneses. It's a fool's game. Don't trust anyone. No one care about your money more than you, and money simply can't buy happiness.
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And then at 7:00, the "CAPITAL GANG", asks did George Bush make himself the fall buy on the intelligence mistake? And is he declaring war on gay marriage? Don't miss it. We'll be right after a break with the headlines.
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Aired August 2, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDERICKA WHITFIELD: Welcome to "Dollar Signs,". One of the most exciting things can can happen to a family is having a baby. While proud parents are happy to show off that new bundle of joy, they may forget they need to start saving for college now. CNN financial correspondent Ali Velshi looks at investing for your kids' education.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL CORRESPONDENT: Oh, baby. Proud new parents Ashok and Michelle Nachnani are too busy with Noemi's hourly needs to think too far ahead. After all, little Noemi's first day in college is still more than 6,000 sleeps away.
ASHOK NACHNANI, NEW FATHER: It's a bit of a concern just, you know, you try to work out the numbers and just managing your household budget, you try to figure out exactly how much is left over and what you'll be able to actually put away for education in it. It becomes a bit challenging, a little bit stressful.
VELSHI: But is there a solid plan to turn this little girl into a graduate someday?
NACHNANI: I guess our plan initially is just been save the money and try to find a decent place to invest it and then when the time comes, we'll just draw from that to pay for whatever expenses we have.
VELSHI: And those expenses are staggering. Tuition, room and board are rising on average at a rate of 5 percent annually. If Noemi attends a public college in her own state at about $23,000 a year, they'll have to put away $2,839 a year starting right now. And it will have to earn 6 percent each year. What if she wants a fancier education?
SIDNEY KESS, ACCOUNTANT AND LAWYER: Children also have no idea. They all want to go out of town. They want to go to a private school and it's become a ritual in many middle-class families for the parents to go shopping around and visiting different colleges and looking at the campuses. But no one really takes stock of the realities of paying those bills.
NACHNANI: I don't have Ivy League envy or anything, so I don't need to spend $100,000 a year for that education.
VELSHI: Well, maybe not $100, but it might be 60 grand a year at an Ivy League school by the time little Noemi is a freshman, that's a quarter of a million dollars for an undergrad degree. To cover that completely, Nashok and Michelle have to save $7,361 per year. How do parents save this kind of money?
UNIDENTIFIED MALE: Not everybody's going to be able to retire comfortably and pay for four solid years of a child's education.
VELSHI: Make your child's college education as much of a priority as saving for retirement and buying a home. Also, contribute to college savings plans and tax shelters like the 529 plan.
DOUG FLYNN, FLYNN/ZITO: If you can't fully save 100 percent, shoot for at first for 25 percent. The worst thing that happens is at least you know you've got one solid year of that child's education saved.
VELSHI: And start saving early, as soon as your future graduate is born. If you plan when your baby is in one of these -- you'll be in good shape when she needs one of these. And just in case, Ashok and taking out some added insurance.
NACHNANI: Yes. I mean, started buying lottery tickets every day.
(END VIDEOTAPE)
VELSHI: Here's the thing, Fredericka. We're talking about a quarter of a million dollars for the best education 18 years down the rode, four years of an Ivy League education, undergraduate. Ther are some estimates it may cost up to a quarter million dollars to take your child from birth to the age of 18, and then you've got to look at your own retirement situation.
So we're looking at a lot of money before anybody even thinks of just putting money into a bank account so their kid might be able to spend it later in life. These numbers are staggering, you've got to adjust your financial plan when you have kids -- Federicka.
WHITFIELD: Staggering and depressing, Ali. We're going to talk more about this. We'll be having you back in a moment. But for now, saving for your kids is great. But teaching them to save and invest in the future are also important life lessons. And it's not as difficult to do as you just might think.
Oh, yes? well, co-host of the "Motley Fool" radio show, David Gardner, is live in Washington with tips that anybody could use. Good to see you, David.
DAVID GARDNER, HOST "MOTLEY FOOL": Hi there, Fredericka.
WHITFIELD: Well, it's really easy to teach a kid. Maybe you don't have to teach a kid how to spend money, they get allowance, paycheck, if they're a teenager, they can't wait to spend it. How in the world do you start encouraging them to save?
GARDNER: Well, I think it really is a team effort. Having just watched that segment along with you, I think one thing that we all have to remember is that we need to work with our kids together. I mean, a lot of kids do help out with their own college education. So I think the anxiety bar was raised a little too high by what we just saw because it makes it sound as if it's all on us. The truth is that a lot of kids help themselves put themselves through college. And you know what helps a lot to get them to think that way?
WHITFIELD: What?
GARDNER: By making a team effort with them as they're growing up. It's just what our dad did for my brother and me, teaching us about the stock market, starting an account for us at birth, and setting us up. And I think it was great to see a really young couple there in the sketch you threw out there because if you start when the child is that young, you give yourself about two decades worth to compound that money that you're saving. So those are a couple things that I initially think about when I watch what we just watch.
WHITFIELD: You talked about how your dad got and you your brother into investing. Let's talk about some other lessons or other ways to convey the lessons to kids about saving money, not spending it. Credit cards always end up being enticing to a lot of young people when they start making money. How do you really impose on these kids that credit cards really may not be the way to go? To get there their, you know, financial dealings started?
GARDNER: It's funny. When you put it that way, Fredericka, it's funny because obviously so many adults have problems with credit cards.
WHITFIELD: That's true.
GARDNER: For starters, you really have to be a little numerical. We're not talking about advanced math. We're talking about fifth grade math. Just look at the percentage that you're having to pay on an average credit card today. If you don't pay it off by the end of the month, it's about 15 percent.
Once you learn another number, and teach your kids this, too, that the stock market historically rises about 10 percent, you'll see that borrowing off the credit card, you will never make that back up. So all of us need to start with ourselves, and the example we set for our kids by getting out of debt in the first place, but also teach they're they're conveniences, but if you end up not paying off your balance, you're putting yourself in a hole.
WHITFIELD: Wow, so forget the credit cards, you don't want to make payments to the credit cards. Instead, maybe, if you're going to make payments, make payments to yourself.
GARDNER: Yes, that's a wonderful tip. I think a lot of us are practicing this pretty well these days. I think financial education is so much better than it was 15 years ago. If you are paying yourself first that means you're putting away money for retirement or putting away money for you child's 529 college plan, which we can talk about. That's a very effective way to set yourself up and avoid the temptation not to do that stuff.
Human nature is always telling us to spend now. But if instead we discipline ourselves and set it up so we don't even notice that that $100 or $200 was deducted from our paycheck to pay for our kids' college or to pay for our retirement, we really set ourselves up in a much better place.
WHITFIELD: All right, David. Well, as promised, we want to make this a real team effort here in trying to help get our kids on track financially. So Ali Velshi is back with us. Ali, we've also got a phone call to help motivate this conversation with some questions and comments.
Lee from Dallas is our first one on the line. Lee, what's your question or comment?
CALLER: Hi. How are you doing today? I just have a brand new baby. And I was looking around for a 529 for her college fund. And what kind of advice can I get from y'all as to how much I should put in each month?
GARDNER: Well, I think first of all, and I'll take it to Ali shortly, but I just think that anybody whose looking at 529 plans should definitely look at the Internet because so many of us are using it today, and that's really the best and most meaningful way you can look over the whole country. Every state has a 529 plan. And each of us, whether we're in Texas or Maine, we can invest in any state's 529 plan. The only way you can meaningfully and look through, savingforcollege.com is a good site to help you do that.
VELSHI: That's exactly what I was going to say. The advantages to investing in your own state will depend on what advantages your state offers you in terms of tax deduction. Check that first. Get on the Internet.
You have to plan your 529 the way you would plan your retirement savings. There are calculators. It will tell you how much you're likely to need. You have to make decisions about whether you're thinking of financing a state education or a private education. But that's all available, readily available on the Internet.
WHITFIELD: All right, guys, hold tight for a second. We're going to take a short break. More with Ali Velshi and our "Motley Fool" David Gardner coming up next.
And of course you can still e-mail "Dollar Signs" at cnn.com or you can call us at 1-800-807-2620. We'll be right back with your questions.
(COMMERCIAL BREAK)
WHITEFIELD: Welcome back to "Dollar Signs." We're talking about investing and your kids. Co-host of the "Motley Fool" radio show, David Gardner is with us from Washington and our own financial correspondent, Ali Velshi, is in New York.
You guys, we want to leave off where we left off. Now we're inspired by an e-mail coming from Max asking "when is it, perhaps, too early -- if it is ever too early, to start a retirement account? Starting a retirement fund at 16. Any advice?" that from Max?
VELSHI: Yes, Max, give me some advice.
GARDNER: Great to see Max is already thinking about it at that early age. IRA's can be opened by kids, their parents on behalf of kids, if the child has earned income. So if Max has a summer job and he's able to make 2,000 bucks, he can start opening up his own IRA at this age with his parents' help.
I would suggest the Roth IRA is a wonderful option for someone like Max, and also I think Max should try to max out the amount that he's putting in, put away $2,000, if you can. Parents, we can help our kids out a little on this, paying for their way through their teenage years and allowing them to save most of what they're making in summer right through the bottom line. I would also take a hard look at the stock market for that Roth IRA, Max.
WHITFIELD: Ali?
VELSHI: That's exactly where I was going with this. Even if he doesn't qualify for an IRA, Max is young enough to have a good risk tolerance. He's got a lot of years ahead of him. He can take advantage of a diversified stock portfolio by buying into a mutual fund with lots stuff available to him.
By the time if he has earned income, if he doesn't have it now, he'll have generated enough money to be able to max out his tax- sheltered investments by the time he starts working. It's actually a great plan, Max. There's no such thing as too early to start planning.
WHITFIELD: Even for the Roths now, isn't it now $3,000 that they can contribute?
GARDNER: That's right.
WHITFIELD: That's the new rule.
OK. Ronnie from Atlanta is on the telephone with a question or comment. Ronnie, what you got?
CALLER: Hi, guys, I just have a question about gifting money to your children. I know you're allowed to gift $11,000 a year. Does the child pay any taxes it?
GARDNER: No. That gift is -- that's a free gift, and you can do it -- if you have two parents in the family, you can each do it. So you can really stack up money in a kid's account. And I think we've been been pretty good at emphasizing the importance of doing that early.
One statistic that might be helpful to think about Ronnie, $1,000 invested at a child's birth, in 65 years, if you just leave it in a stock market index fund and look at historic levels, that will be $1 million at the age of 65. Now, that's not saving for college, that's a gift for the child's life. But, you know, the child will be making other money, too, but it would be awfully nice to think that 65 years from now you'd have $1 million just based on $1,000 patiently invested early.
WHITFIELD: Wow. Ali, anything to add to that?
VELSHI: Yes, the idea of gifting is actually something a lot of people wait too long to think about. It's a major tax advantage to be able to give the $11,000 per year or $22,000 if you're a married couple. Really needs to be thought of early on because what it does is it leaves you wotj less when you pass on for your estate to be taxed on.
WHITFIELD: All right. Here's another e-mail. This one coming from Martha. "I didn't know I would legally be required to give my son the money from the UGMA account at age 18, can I put this in some kind of vehicle with minimal or no penalties so I don't have to hand the kid thousands of dollars at 18."
GARDNER: Well, well, well. You know, the answer is, unfortunately, Martha, no. And frankly, I'm glad that that acronym came up, UGMA stands for the Uniform Gift to Minors Act. And we talked about saving for kids today and putting away money, but we haven't maybe been hands on about how you do that.
You just go to a brokerage firm, open up an account and register it under the Uniform Gift to Minors Act, UGMA, in some states UTMA, Uniform Transfer to Minors Act. What it means is the money you put away for that child will be that child's when that child comes of age, is no longer a minor. In some states, 18, other states 21.
That means for Martha in Florida, her son or daughter will get that money. I'll say, as a beneficiary of that act myself, when I turned 18, I was very grateful. I misspent some of it, but my parents had made some good decisions and helped me along the way teaching me about saving and investing in stocks. So that's something you could do, Martha.
WHITFIELD: Wow. Okay. Go ahead, Ali.
VELSHI: When we're talking about college savings plans, they're excellent vehicles, tax sheltered vehicles, but when you look at something like the 529, you're leting that money grow tax-deferred, tax -- where you're not going to be paying tax on it if you don't have the income to generate tax on it, but if your kid gets to the age where they're supposed to be using that tax for college and decide they want to be a rock star instead, you lose the benefit of putting that money -- the Nachnani's in the piece I did, were talking about not knowing where to put the money and keeping it in a general fund and then drawing upon it as they needed it later.
You're not sure how your child is going to exercise the money you put aside for education, you have to be careful where you put it. You could end up paying more penalties than you save.
WHITFIELD: All right guy, and david, you alluded to it a moment ago, how your parents taught you the principles of budgeting early. We're going to talk a little more about the word budget and why some families seem to think that's a dirty word. Well, it's not. We're going to attack that issue when we come right back right after this break.
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WHITFIELD: Welcome back to "Dollar Signs." We're taking your e- mails and calls today to help you teach your kids about the value of a buck and ways you can help them invest.
David Gardner is with us from Washington, and Ali Velshi is in New York. And guys, we were talking about budgets. And family budgeting a little bit before the break. And David, let's talk about why budget is not a dirty word. Why should kids learn to embrace it early?
GARDNER: Well, I think that we as parents don't really have much experience doing it ourselves. And it's just about the last thing most of us want to do. So it's hard to get our kids really thinking about that, but the fact is, once you start budgeting, you actually know where your money is. You can, as it says on the screen, pay yourself and pay your bills. You've thought about it ahead of time, and then you have -- you know exactly how much you can save left off after that.
And I think in particular, it's great for your kids to start insenting them. That means, start rewarding them for saving themselves. And that's a big thing that a point we make all the time on the "Motley Fool." A lot of our members do this. You actually just say son, daughter, if you put away a dollar, I'll put away $3 for every dollar you put away, as an example. It's a great way to get kids thinking, budgeting saving.
WHITFIELD: Wow, that's good incentive. Well, Mike in Las Vegas is on the telephone. Perhaps he has soem ideas, or maybe has a question. Mike, what you got?
CALLER: Yes, thanks for taking my call. I'm just working with a company that's been on the books for about 31 years. And they're out of Oklahoma called Prepaid Legal. And I'm curious, they have a stock program built into the company. How much of my investment portfolio from the earnings of the company should I realistically spend in reinvesting back in my own company for my own retirement program?
GARDNER: That's a great question. For those who did it at Enron, it cost them dearly. For those who've done it at Coca-cola over the years, many of them are millionaires. So I think a good rule of thumb here is to think about, if you really believe in your company, first of all, you're going to have a much better sense of the value of Prepaid Legal, the people you're working with, the sense you get of whether or not you're creating something great together here over the next decade. If you love your company I can see putting about half, up to half in my employee retirement account, you know, toward -- often you'll get a discounted stock you can buy. So I would think of it that way.
I would also maintain at least half outside invested in an index fund or something else that you understand.
WHITFIELD: And Ali, I'm going to have you attack our next e- mail.
VELSHI: Okay.
WHITFIELD: If you will in a moment. This from Terry in Ohio. Terry is asking "Is it preferrable to buy your newborn child a rental property, such as a duplex and take advantage of the real estate tax and appreciation benefits rather than investing in the stock market?"
VELSHI: That's an interesting question.
WHITFIELD: No kidding.
VELSHI: It's only preferable if you happen to prefer that form of investment. It would be the same reason it would be preferrable for you to invest in a rental duplex as opposed to the stock market.
If you understand the property market and you have an income situation which allows you to take advantage of the tax benefits of having real estate and particularly of having a mortgage you, in many cases, can beat the market average that we were talking about earlier of 10 to 12 percent over time.
If you don't know anything about real estate and you're not in a position to take advantage of tax write offs by owning real estate, then no, it's probably better to have your money in a diversified portfolio. If you're making that decision on behalf of your child, you have to make that exactly the same way you would make it for yourself.
The advantage of time and appreciation in real estate is not going to be a major consideration in this discussion because your child has a long time horizon, whether it's in real estate or the market. I think you'd have to make that choice.
Do you know anything about real estate? Are you interested in being a landlord? if you do, you can probably do better than the market. If you don't, you'll find it frustrating.
WHITFIELD: And david, if you could chime in as well.
GARDNER: Sure. There's a lovely phrase on the screen a minute ago, the magic of compounding. That really refers to putting little amounts of money away early and letting that grow over time. A good example, Fredericka, I gave earlier, one we talk about all the time at the "Motley Fool", $1,000 at a child's birth enjoying the market's average of 10 per year, by the time that child is 65 -- you didn't add anything else, just that initial $1,000 -- right about $1 million.
That's the magic of compounding, small amounts believe to greater amounts over time. I do want to emphasize, we want talked enough about it probably enough this afternoon, the importance of the stock market. We've all lived through 2000, 2002, we know the stock market can go down. Most of the time it goes up. Especially when you're thinking about your child and looking over the long term, you should be invested in at least the index fund, if not some individual stocks too.
Our kids often lead us to the best companies because they're buying great stuff out there. Video games, these day, Electronic Arts is a great stock.
WHITFIELD: Invest in what they like.
GARDNER: Listen to your kids. Get them thinking about it.
WHITFIELD: David Gardner of "Motley Fools" and "Ali Velshi" of our CNN financial network. Thanks very much to both of you, appreciate it.
And, of course, the bottom line to these kids out there, and this from fool.com, don't keep up with the Joneses. It's a fool's game. Don't trust anyone. No one care about your money more than you, and money simply can't buy happiness.
All right, well, it's a hot August night on CNN. Up next on people in the "PEOPLE IN THE NEWS", Jennifer Lopez, Ben Affleck and the late great Bob Hope are all profiled.
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