First, I’ve got to clear the air as I’ve already misled you on the title of this article. To begin with, I don’t even know if I’m a financial advisor. I mean, that term is used so loosely that anyone and their mom could call themselves a financial advisor. I do know that I am a partner in a wealth management and financial advisory firm, and I talk to people about financial planning and optimizing savings strategies all the time. I also know that my background is a retirement actuary, and I passed every exam they threw at me to earn my Fellow of the Society of Actuaries. As such, I feel credible enough to give my son, and the internet, some free financial advice. But there’s the second item I misled you on. It’s true that I have a son, but I also have three daughters, and I even have two more sons. And my wife is carrying another unborn child of mine. And while the fact still hasn’t hit me that I effectively have 7 children, the point is that this ‘financial advice’ is equally applicable to each of them…sons and daughters alike…and even your children.
Alright, now that I’ve got that off my chest about misleading you in the title of this article, I’m ready to share three things that I’m already talking about with my son (and my daughter, and the other when they age a bit more, but for the sake of this article…let’s just stick to “son”). Before I jump in though, let me just say that I’ve already covered the basics and this article is not focusing on those basics: Save early. Save often. Don’t overspend. Get the maximum match in your 401k from the company from which you’re employed. Have liquidity. Protect your income…it’s your greatest asset. Diversify, not just investments, but also tax strategies across pre-tax, Roth, HSA. Yes. Yes. Yes. You know all these things as you’ve read some of my other articles.
Today I’m talking beyond the basics, and I’m talking about the stuff that I really want my kids to know and execute upon to give them a leg up.
Number 1: Contribute to your Roth IRA and do it now. Sure, this is in the basics, but there’s more here. I love Roth IRAs because of the tax-free earnings and the flexibility to withdraw contribution basis at anytime. Anyone early in career or at low marginal tax rates should be contributing to a Roth IRA. But the earlier the better, and getting my son to understand the value and build the habit of using this tool…the better. How early? Well he’s 9. So now. We’re already getting him earned income so that he can make contributions. We’re hiring him to do some work around the house and to help out with my wife’s furniture business. He’s a great wood waxer. He’ll get a paycheck from us and a 1099. And then he’ll get a lesson on why he needs to put 100% of it into his Roth IRA. The beauty of creating this understanding now is that as he generates his own income in a few years, he’s got the habit down. We’ll even give him some matching incentive in the future. If he earns $7,500 in the future as an example, we’ll ensure $6,000 gets into his Roth IRA. We’ll match him $1 for $1 on his own contributions. Put in $3k son, and we’ll put in $3k too; and you still have $4,500 to spend. He’ll do it. What we’re really encouraging here is getting him a very healthy Roth IRA balance out of the gate when he’s young. No 529 or checking or savings account necessary…just get that Roth IRA rocking.
Number 2: Plan to move every 2 years. One of the best ways to build tax-free net worth is sweat equity in real estate. If you live in your home as your primary residence for 2 years, then the gain on the sale is exempt from taxes up to $250,000 as a single filer and $500,000 married. When you’re young, there’s no better time to put in some sweat equity and do some home improvements. You’ve got the time. So my advice is to buy the cheapest house on the block, renovate over 2 years, then list it, take the cash, and repeat. Do it as many times as possible until you’re married and have children and just don’t have the time to allocate anymore.
Number 3: Gig it and gig it from home. Even if you have a corporate job, you should have a lifestyle business that you’re running out of the house. Step one is to figure out what passions or hobbies can be monetized. Step two is to run a business with the passion or hobby and start using every day expenses as business expenses as applicable. I’m not talking about doing anything sketchy. I’m talking about cell phone bills, and internet bills, and other utility bills, etc. Basically, stuff that you’re otherwise paying a bill for because it’s basically become a necessity of life, but it just so happens it’s a necessary expense to run the business and gig it. You’re shifting more of your life into a tax-free lifestyle and that’s what we’re going for here. An added benefit is that if you do start making significant cash, you’ve got the ability to open a self-employed 401(k) plan and reduce taxes even further. There are a lot of benefits on the self-employed 401(k) alone, like being able to decide how much of your income your sheltering as you’re figuring out your tax bill for the prior year, but a full discussion is warranted elsewhere.
So there you have it. When it comes to my son, in addition to the financial basics, I’m telling him to start his Roth IRA early, to buy and sell a house every 2 years, and to find a fun way to hustle on the side.
If you want me to give your son some financial advice as well, stop on by and introduce him!
Contributed by Brian Riefepeters, FSA, EA