Cushion Your Investments

Prepare for job loss, natural disasters, medical bills, and other personal catastrophes by building a cash savings account (a bank account!) that equals 3-12 months of annual income. Hopefully the balance of your cash account will eventually protect you from poverty during retirement. Think of your cash savings account as an emergency fund during years of employment and a retirement fund during retirement.

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Necessities

Financial necessities of life are the same for all people, but sadly, few of us possess a complete set. Most people are unaware of the five main necessities:

Protection begins at birth with the personal safety provided by caregivers to ensure food, shelter, healthcare, and a healthy lifestyle for children. Our best chance for living a full, meaningful life includes safeguarding the well-being of young people (and dependent adults), saving for unemployment, and seeking consumer protection.

Skills are the learned abilities of reading, communication, thinking, and performance. Education and experience provide these skills. High school graduates are more likely to find employment than high school dropouts. Trade schools and higher education improve your chance for employment after high school graduation.

Income is the money received as a gift or earned as a reward for work. Either way, income is essential for paying the usual expenses of living and recovering from financial hardship. Use a budget to plan for paying current and future expenses.

Savings are the valuable items we set aside for future use. One example is the use of a food pantry to store food at home in case of a food-shortage in grocery stores. The loss of income due to unemployment or disability is almost certain to happen at sometime during life. Saving money in an insured bank account is strongly recommended for everyone. Investing money to pay for future expenses is also strongly recommended.

Sharing with other people brings personal satisfaction and strengthens your community network.

Copyright © 2020 Douglas R. Knight

Practical investing

Concepts: Impractical investing is the riskiest, often expensive, way of saving money for future use. Practical investing is the safest way to save money. The most practical investments are savings accounts, bonds, and brokerage accounts.

Practical investing is the long, slow process of saving money for future use.  Not by stashing it at home, but by giving it to a trustworthy person outside of home who will protect it, and better yet, put it to work earning extra money on your behalf.  ‘Protected money’ helps defend against future emergencies.  ‘Extra money’ helps pay for expensive things, caring for family members, and retiring from work.  The most practical investments are savings accounts, bonds, and brokerage accounts.  

Savings accounts are available in banks and credit unions.  Shop around to find the best deal for you and when you apply for an account, be sure it is FDIC insured (FDIC stands for the Federal Deposit Insurance Corporation). The FDIC insures against accidental or criminal loss of all the money held in your account up to the limit of $250,000 per account holder, per bank.  

  • ADVANTAGE- Money is easily deposited and withdrawn.
  • DISADVANTAGE- The interest rate is very low, usually below our national rate of inflation.
  • RECOMMENDATION- Use your savings account as an emergency fund to pay for catastrophes such as job loss, medical bills, and other overwhelming events. Try to save 3-9 months of wages in your emergency fund for the rest of your life. 

Bonds and CDs (CDs are certificates of deposit) usually pay more interest (interest is ‘extra money’) than savings accounts.  Bonds sold by the U.S. Government are guaranteed to be fully repaid with interest after a specific period of time.  Bonds sold by companies are fully repaid with interest unless the company is unable to make the payment.  CDs are sold by banks and credit unions, and insured by the FDIC.  

  • ADVANTAGE- The seller promises to repay you the full amount of the bond plus interest. 
  • DISADVANTAGES- The full amount plus interest is not repaid until the maturity date.   “Investment grade” bonds are usually repaid, but “junk bonds” may not be repaid.
  • RECOMMENDATION- Purchase bonds and CDs with maturity dates at or below 5 years in order to save for startup projects such as buying a car, new business, or new house.

Brokerage accounts sell securities such as stocks and stock-index funds.  The accounts are “SIPC insured” if the broker is a member of the SIPC (SIPC stands for the Securities Investor Protection Corporation).  The SIPC insures against financial failure of the broker and unusual loss of securities by the broker.  The SIPC insurance limit is $500,000 per customer, including no more than $250,000 cash, for all of the customer’s accounts combined. SIPC insurance does not protect against investment losses.

‘Extra money’ from stocks and stock-index funds might exceed the interest rates of bonds and CDs, and also exceed the rate of inflation.  But stocks and stock-index funds are riskier investments than bonds and CDs because you could lose money in the stock market.  

Three good ways of earning money in the stock market are 1) buying shares of a reputable stock-index fund, 2) holding the shares for a long time, and 3) reinvesting stock dividends.  All three ways are illustrated in the following graph:

dividend reinvestment

The graph shows 33 years of growth-in-value of a stock-index fund that was invested in a group of stocks measured by the Standard & Poors 500 Index (the “S&P 500″).  The stock-index fund earned ‘extra income’ in 2 ways: 1) from stock dividends and 2) from growth-in-value of the fund.  When all dividends were reinvested by buying additional shares of the fund (blue line), the final fund value of $6,000 was twice what it would be, $3,000, when the original number of shares were held without reinvestments (red line) for the entire time.  The blue line represents compounded growth.

Impractical investing is a very risky, often expensive way to save money.  The very risky investments include junk bonds, initial public offerings, partnerships, leveraged funds, commodities, currencies, collectibles, options, derivatives, hedge funds, and property ownership.  The possible expenses are high commissions, high tax rates, tax accountant fees, illiquidity (tied-up money), and costly mistakes.   

Useful references

FDIC. https://www.fdic.gov 

SIPC. https://www.sipc.org 

Introduction to Treasury Securities.  https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp 

TreasuryDirect®. https://www.treasurydirect.gov/ 

The Index Card.  Why Personal Finance Doesn’t Have to be Complicated. {http://wp.me/p1LlDo-KQ} Helaine Olen, Harold Pollack. Penguin Publishing, New York, 2013.

roadmap to investing.  https://www.sec.gov/reportspubs/investor-publications/investorpubsroadmaphtm.html 

Copyright © 2020 Douglas R. Knight 

 

Questions from a friend

Questions:  I was wondering if you have some favorite web sites to get information about investing for a thirty something person.  And also for a teenager that has a part time or full time job.  In both cases, to save for retirement or even to save up for a down payment on a condo or house.

Thanks for your questions.  My advice to teens and young adults is to start an emergency fund before investing in securities.  They should gradually build a large emergency fund of dollars in the bank to use for job-loss and other big financial emergencies (see book called the Index Card in the Young Adults section of the link below).  

Teens who declare earned income to the IRS can deposit an equal amount of earnings in a custodial Roth account (see video on Hannah’s Roth account in the teens section of the link below).  It’s important for teens to learn how to open and manage an investment account such as the Roth.  In the Roth, I recommend holding a broad index stock fund for life; it will weather the ups and downs of the stock market over time (several good internet sites for teens in the link below).  

Thirty something persons need a tax-advantaged retirement account.  Employed persons should participate in their employers 401(K) plan [or similar plan] to the fullest extent above all other financial goals, with exception of building an emergency fund and getting out of debt as very top priorities; the condo and house are lower priorities.  Unemployed persons should check eligibility for SEPs, other retirement accounts, or IDAs (start with the “money basics” and sec .gov websites in the Young Adults section link)

Link: 

Copyright © 2019 Douglas R. Knight 

Family topics

Starting your family’s tradition of investing [under FAMILY TRADITIONS]

Childhood is the perfect time to learn about investing and responsible adults are the ideal teachers. The best way for parents to teach money management is by setting a good example.  Parents can reinforce their example by playing financial board games and video games as a family activity.  Assistance and supervision reinforce the development of good financial habits such as creating and using a budget.  Discussions and field trips are powerful methods for showing children how adults use bank and investment accounts.

Desired skills and knowledge of young investors:

  • Resilience and self-control
  • Reading
  • Counting money
  • Managing money
  • Shopping wisely
  • Sharing
  • Saving
  • Investing
  • Taxes
  • Debt management

Copyright © 2019 Douglas R. Knight

Reading list for young people and their families

References to books and online materials are sorted by age groups from pre-schoolers to grandparents.  URL links are printed in blue letters to provide quick access to a website. Click the computer’s mouse on those letters.

Pre-Schoolers

books

  • Dollars, by Mary Hill. Welcome Books (™): Money Matters. Danbury, 2005. Teaches children to recognize and count money. 
  • Spending and Saving, by Mary Hill. Welcome Books (™): Money Matters. Danbury, 2005. Examples of good ways to use money. 

internet reading

internet videos

Pre-Teens

books

  • The Kids’ Money Book. Earning, Saving, Spending, Investing, Donating. by Jamie Kyle McGillian, Sterling Children’s Books, New York, 2016. Author encourages children to earn and use money wisely.
  • Money $ense for Kids. by Hollis Page Harmon, Barrons, Hauppauge, 2005. An age-appropriate explanation of investing.
  • Investing Money. by Helen Thompson, Mason Crest, Broomall, 2011. A thorough and useful explanation of investing.  
  • Personal Management. Boy Scouts of America Merit Badge Series.  Brent A. Neiser, et al. 1996, 2012. A brief guide to personal finance.  

internet reading

internet videos

Teens

books

  • The Teenage Investor. How to Start Early, Invest Often, and Build Wealth. Tim Olson, McGraw-Hill, New York, 2003. This teenage author gives a complete explanation of the methods, risks, and rewards of investing in financial markets.  
  • A Gift to My Children. A Father’s Lesson for Life and Investing.  Jim Rogers. Random House, 2009. A successful investor’s good advice to teens.  
  • Dollars & Sense. A Kid’s Guide to Using- not Losing- Money. by Elaine Scott and David Clark, Charlesbridge, Watertown, 1916. A practical explanation of our financial system.  
  • Neale S. Godfrey’s Ultimate Kids’ Money Book. by Neale S. Godfrey and Randy Versogstraete. Simon & Schuster, New York, 1998. An illustrated introduction to personal finance. 
  • The New Totally Awesome Money Book for Kids. by Arthur Bochner, Rose Bochner, and Adriane Berg, Newmarket Press, 2009. For pre-teen and teenage entrepeneurs.
  • TeenVe$tor. The Practical Investment Guide for Teens and Their Parents. by Emmanuel Modu and Andrea Walker. teenvestor.com. Guidance on ways of earning an investment return.   
  • Street Wise. A Guide for Teen Investors. Janet Bamford, Bloomberg Press, Princeton, 2000. A narrow view of investing, focused on the time consuming of investing in stocks.
  • Exploring Business and Economics. Investing Your Money. Fred Barbash, Chelsea House Publishers, Philadelphia, 2001.
  • Confessions of a Scholarship Winner.  Kristina Ellis, Worthy Publishing, Brentwood, 2013. An inspiring story of a teenager’s quest for earning $50,000 in scholarships.  

internet reading

internet videos

Young Adults

books

  • The Index Card.  Why Personal Finance Doesn’t Have to be Complicated. Helaine Olen, Harold Pollack. Penguin Publishing, New York, 2013. Read my book review in http://wp.me/p1LlDo-KQ.
  • The Little Book of Common Sense Investing. John C. Bogle, John Wiley & Sons, Inc. Hoboken, 2007.  The scope of this book concerns investing wisely and cheaply in the U.S. stock market. See book review in http://wp.me/p1LlDo-qI.  
  • All About Index Funds, second edition.  Richard A. Ferri, CFA. McGraw Hill, 2007. Author describes the market indices, high-risk index funds, and low risk index funds.
  • Investing Made Simple.  Anthony L Loviscek & Randy I Anderson, Broadway Books, New York, 1992, 2003, 2004. An excellent description of investment choices accompanied by the advantages and disadvantages of those investments.  
  • Stocks for the Long Run, 3rd Ed. Jeremy J. Siegel, McGraw-Hill, New York, 2002. An authoritative textbook on investing in stocks.  
  • Investing in REITs, Real Estate Investment Trusts. 4th Edition.  Ralph L. Block, Bloomberg Press, Hoboken, 2012. A thorough explanation of the risks and returns from REITs.  
  • How to make your money last.  The Indispensable Retirement Guide. Jane Bryant Quinn, 2016, Simon & Shuster, New York. 366 pages. The author is an acclaimed financial journalist who advises people about financing and reinventing life after leaving the workforce. Here’s a link to my book review, http://wp.me/p1LlDo-JE. 

internet reading

internet videos

  • short term savings: https://youtu.be/zer96OhQdxg . Creative ways of saving for current needs during periods of fluctuating monthly income (‘income inequality’).

Parents and Teachers

books

  • Dollars & Sense for Kids, by Janet Bodnar. Kiplinger Books, Washington D.C., 1999. Advice on teaching the value and use of money to children and young adults.
  • How millennials manage money.  https://www.navient.com/assets/about/who-we-are/April_2018-Money-Under-35-Managing-Money-report.pdf . This 2017 survey offers a profile of the financial behavior of young-adult Americans.
  • The Money Tree Myth: A Parents’ Guide to Helping Kids Unravel The Mysteries of Money. Gail Vaz-Oxlade, Stoddart Publishing, Toronto, 1996. A thorough volume of advice to parents on teaching their pre-school, pre-teen, and teenage  children to manage money for a lifetime.  
  • Kids and Money. Giving Them the Savvy to Succeed Financially.  Jayne A. Pearl. Bloomberg Press, Princeton, 1999. Author interviewed parents, used experience with own child, and sought advice of consultants to write this book for parents. 
  • Smart Money Smart Kids. Raising the Next Generation to Win with Money.  Dave Ramsey and Rachel Cruze.  Lampo Press, 2014, Brentwood. Author speaks with experience about recovering from catastrophic debt and teaching children how to avoid debt.  
  • Make Your Kid a Money Genius (even if you’re not). Beth Kobliner, Simon & Schuster, New York, 2017. See my book review in the following web site, http://wp.me/p1LlDo-P8.
  • Happy Money, The Science of Smarter Spending. Elizabeth Dunn and Michael Norton. Simon & Schuster, New York, 2013. Includes good ways and benefits of sharing money, illustrated by video in https://youtu.be/c39wUIKUSk0 .
  • Earn It, Learn It. Teach Your Child the Value of Money, Work, and Time Well Spent.  Alisa T. Weinstein, Sourcebooks, Naperville, 2011. The pre-teen child earns money from their parent by choosing a task from a career profile and completing it in a timely fashion.
  • Paying for School. How to Cover Education Costs from K to Ph.D.  Robert Brokamp, The Motley Fool, Inc. 2003. Discusses ways to finance the costs of attending private schools, colleges, and graduate schools.
  • Paying for College Without Going Broke.  2018 Edition. Kalman A. Chany with Geoff Martz. Penguin Random House. The Princeton Review, 2017. Authors offer strategies for selecting colleges and paying the cost. 
  • The Financial Diaries. How American Families Cope in a World of Uncertainty.  Jonathon Morduch and Rachel Schneider. 2017, 233 pages, Princeton University Press.  Authors describe the coping mechanisms of families trapped in conditions of financial insecurity.  
  • Can the Poor Save? Saving & Asset Building in Individual Development Accounts.  Mark Schreiner & Michael Sherraden.  Transaction Publishers, 2007. Low-income persons might benefit from an individual development account (IDA). 

internet reading

internet videos

Grandparents & Third parties

internet SITES

Copyright © 2019 Douglas R. Knight 

Simple Conversations About Money

Mary Hill is an author of children’s books.  Her set entitled Money Matters is designed to teach beginners how to count and use money.  The book titles are Pennies, Nickles, Dimes, Quarters, Dollars, and Spending and Saving.  These small thin books are easy for pre-school children to read and carry.  About 18-24 pages in each book alternate between a simple sentence on the left page and a full sized illustration on the right page. The sentences are printed in large letters and illustrated with attractive photographs of real money and real people. A simple glossary is provided on the last page to facilitate understanding of the terms and pictures. 

I found 2 of her 6 books in the Children’s section of our city library.  In Dollars (ref 1), the U.S. dollar bill and dollar coin are described by appearance and cash value.  Denominations of dollar bills are illustrated for $1 through $100.  The attentive reader will quickly learn to recognize real money in contrast to play money. 

In Spending and Saving (ref. 2), author Hill explained how earned income is saved and spent.  Her pictures of adults at work show a healthy lifestyle for generating personal income.  Children learn that they can save money by giving it to a bank teller or putting it in a piggy bank.  The topic of spending money applies to choices among expensive items, such as a house, and everyday items such as groceries and school supplies. The attentive reader is exposed to several ways that adults earn money and use it wisely.

Young children who like to use computers can learn more about money at these websites:

References

  1. Dollars, by Mary Hill. Welcome Books (™): Money Matters. Danbury, 2005. 
  2. Spending and Saving, by Mary Hill. Welcome Books (™): Money Matters. Danbury, 2005. 

Copyright © 2019 Douglas R. Knight 

Why This Blog?

Everyone needs money to take care of themselves. Yet people generally mismanage their money and retire with inadequate savings.  Poverty is a miserable condition and I see no other way to completely escape it than to invest wisely.  The purpose of this blog, “Raising Young Investors”, is NOT to create a generation of tycoons but RATHER to guide young people toward financial security. I hope WE can inspire young people to make investing a lifetime habit.  The process of developing young investors is summarized in an Overview.

 Douglas R. Knight