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Where’s the line between providing for your kids and enabling them? What can you do as a parent to make sure they understand the relationship between money and work?
From the types of jobs available to the way we pay for stuff, and our ability to buy anything online — the money paradigm has shifted dramatically in one short generation.
On this episode of the Dentist Money™ Show, Reese and Ryan share ideas for teaching your kids money management skills in the new economy.
Reese Harper: Hey Dentist Money Show listeners. It’s Reese Harper here. I’m excited about today’s episode because Sir Ryan Issac and I have cracked the code on teaching kids about money. Hopefully, you enjoy this one. We learned a lot in the process of doing research and interviews with people about what they’re teaching their kids, and hopefully you can learn a thing or two about how to save money for college, how to teach your kids about work, what type of accounts to use, and all the stuff that you’ve probably been struggling with like we were. So thanks again for tuning in and enjoy the show.
Announcer: Consultant an advisor or conduct your own due diligence when making financial decisions. General principals discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor.
Speaker: This is Dentist Money. Now, here’s your host Reese Harper.
Reese Harper: And welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host Reese Harper here with my trusty old cohost, Sir Ryan Issac.
Ryan Isaac: Coming to you live from the cockpit.
Reese Harper: Dude, I love the elements T-shirt you got going on today.
Ryan Isaac: It’s my gear. I sleep in it. It’s my night shirt.
Reese Harper: Barbie. Actually, my wife Barbie, for those who don’t-
Ryan Isaac: Not the brand.
Reese Harper: Didn’t really introduced her to the podcast. And despite what you might think based on her first name, she’s a Japanese-American citizen. Barbie sounds more blonde-
Ryan Isaac: 1950s.
Reese Harper: From Utah, but she’s not.
Ryan Isaac: Not the brand Barbie, the wife Barbie. Not the iconic brand.
Reese Harper: So anyway, Barbie’s actually took the T-shirt, the elements T-shirt, and has been wearing it, because she thought it was cool. The first time in our marriage, my wife got interested in my job, was when we made a T-shirt. Yeah, it was cool. I mean, she’s interested in my job every day. I should say she got interested in finance the minute the T-shirt came out, it’s like, “This is cool. What is this stuff?”
Ryan Isaac: [crosstalk 00:02:04] that’s why bands do merch.
Reese Harper: I’m like, “This is a proprietary algorithm of personal finance technology that we’ve been running on for a decade.” And it’s only interesting when the T-shirt comes out.
Ryan Isaac: Well, so shout out to, was it Jenny who made the T-shirt? Because shout out to Jenny for making the shirt in the first place.
Reese Harper: Thank you Jenny. It has been a staple of office apparel and now it’s more of … I want to be a swag employer. I have aspirations to be that kind of a CEO.
Ryan Isaac: Swag employer. Is that a hashtag? [crosstalk 00:02:41]
Reese Harper: I want half mugs and hats and shirts and whatnot. But it takes time and there’s part of me that feels like I don’t have time for this trivial nonsense of swag. But then all these young awesome millennial employees and Ryan Isaac, who still thinks he’s a millennial.
Ryan Isaac: I’m on the cusp technically.
Reese Harper: He’s the first year-
Ryan Isaac: I’m first year millennial.
Reese Harper: They want their swag. They love their swag.
Ryan Isaac: I do. For better, for worse, I’ve ditched collared shirts and ties at speaking events and I wear our Dentist Advisors T-shirts. But I think they’re cooler.
Reese Harper: And we move on to our favorite subject of the year. This has been a hot topic.
Ryan Isaac: This will be a hot topic.
Reese Harper: Mike hot topic.
Ryan Isaac: Except for the people … we need to do another one for people who have fur children; dogs. As in those are their kids. I think they might be more expensive and more of a pain than real kids.
Reese Harper: Well, you still have to save up for dog college.
Ryan Isaac: Anyway. So today, what’s on the show today? Today we are talking about how to save for kids’ futures, with kind of a thread if you will, of how to teach kids about money in the first place. How do you give kids money lessons, which I’m going to be learning something here because I need to learn today. I’ve got four, they need to learn some stuff.
Reese Harper: We got a lot of great ideas for you. A lot of great ideas on this topic. I hope you’ll all be interested in learning what has worked for us in some ways and then what’s not working. [crosstalk 00:04:21] start with, jump in.
Ryan Isaac: Well, I’m going to start with some statistics that I thought were kind of interesting. I posted an article in our Facebook group a couple of months ago. So shout out to the Facebook group. Go join the Facebook group, Dentistadvisors.com/group; great discussions, questions. You can post questions. We answer them on the show. Dentistadvisors.com/group. I posted this, it was a CNBC article, but it was a study from Merrill Lynch about the amount of money people spend on maintaining and paying for adult children, compared to how much the average American spends or saves for their own retirement. Do you remember that article?
Reese Harper: Yeah.
Ryan Isaac: The shocking piece of it. The shocking piece of it was that … I’ll just give you some high level points and you can talk amongst yourselves. Point number one is that 79%, and this is a Merrill Lynch study, so it’s pretty comprehensive. 79% of parents, still provide financial help for their adult children. And the total spending of-
Reese Harper: How many? What percentage?
Ryan Isaac: 79%.
Reese Harper: Okay, wow.
Ryan Isaac: The total spending, it includes undergrad education and expenses, comes to 500 billion; with a B, as in boy. 500 billion annually, while parents are putting away half of that 250 billion a year into their retirement accounts. This comes from Merrill Lynch. So in this study, overwhelming majority of parents are supporting adult children in their lives and they’re giving twice as much money to the kids as they are for their own retirement.
Reese Harper: Do they give any statistics of the 500 building and how it’s broken down? Did you get some of those?
Ryan Isaac: Yes I do actually, it’s kind of fascinating. So I was going to tell you one more thing here. The 500 billion does not include graduate education, wedding or down payment for houses.
Reese Harper: Which they also still spend on?
Ryan Isaac: Which they also still spend on.
Reese Harper: Okay, so what does it include?
Ryan Isaac: So let me pull up my graph here. Food and groceries account for 60% of it. Cell phone 54. No, sorry, hold on. Food and groceries are the biggest category. 60% isn’t the total. These are just biggest categories. Food and groceries followed by cell phone, then car expenses. Then get this school and vacations rank about the same amount of spend.
Reese Harper: Wow. Interesting.
Ryan Isaac: That feels like an easy place to cut if you’re a parent maybe helping, still support an adult child. Don’t pay for their vacations anymore. Then rent mortgage and student loan repayments.
Reese Harper: This is the perfect segue-
Ryan Isaac: No, I’ve got more. No, you can’t segue yet. You got to save your segue. Hashtag Save the segue. Because then I was curious about the trend of these things, and in specific, the college side. So vanguard puts out an annual, it’s actually from this organization called The State Of College Savings Survey. So vanguard did this, this is 2019, so for last year. So here’s the interesting thing is, 79%, same thing. 79% of parents are saving for kids’ college. So this is a little bit different thread here. It’s not just adult children. This is the percentage of people saving for college specifically. So 79% of parents surveyed are saving for college. Half of them 50%, use 529s to do that, which we’re going to get into in this podcast. We’re going to talk about the different ways you can logistically save for kids.
Ryan Isaac: Most people save monthly, like half of the people save it monthly, like 20% are saving quarterly. Here’s what’s interesting though, is 72% of parents expect their kids still to chip in and help. The majority of people don’t expect that they will provide all of it for their kids. Then 57% of all these people still plan to borrow money to help their kids. Because then if on another study from Sallie Mae, this is my last one, then we can segue. Sallie Mae did a study, this is last year, that the average balance in the 529 account, which is what like the majority of parents are using from the Vanguard study, the average balance is $5,441. In a 529.
Ryan Isaac: What do we get from this? Majority of parents are trying to save for the kids’ college. Half of them are using 529s. The vast majority of people are still paying for kids after college and during college. But the average balance in the 529, which is the most widely used vehicle for college savings, is 5400 bucks. College don’t cost 5400 bucks.
Reese Harper: That doesn’t even pay for their weekend parties.
Ryan Isaac: What do you get? You can’t even get the [crosstalk 00:09:07]
Reese Harper: That’s why beer and beverage is so expensive.
Ryan Isaac: Yeah, you can’t even set up like a legit beer pong table for 5400 bucks. Can you? I don’t know. Just guessing. So segue away.
Reese Harper: What did you take away from this? I’m curious, you spent a lot of time on this. What did you take away from this?
Ryan Isaac: Well, I mean these are the statistics. Anecdotally, so my experience just talking to people every day about this stuff, is that it’s for sure a huge concern. I mean, I’ve got four kids, I think about this all the time, but there’s a point where you just can’t afford to give very much to kids. I mean, life is really expensive if you live in an average neighborhood, and I am not even talking about expensive cities, but life is just expensive when you have kids. So anecdotally, like I see this, and people are concerned about this and the data tells us that. But I think people struggle to know how to strike a balance between actually doing that and taking care of themselves.
Ryan Isaac: I mean, if you’re talking about a 20 year old kid needing financial help, but they’ve got like 70 years still to figure that out. If you’re 50, and you’re done working in 15 years, there’s a trade off.
Reese Harper: The segue here. I think that’s great insight. My oldest is 13. I’ve got an 11 year old, an eight year old and a five year old. So I’m barely getting to the point to where I’m having to have real money lessons. I mean I’ve started, probably like most of you, having some interactions at a pretty early age, but it’s pretty real right now. And it’s been a process of figuring out what’s working and what’s not working. The thing that for me, I’m not going to hold … when I share this stuff, I’m not holding myself out as an example of success here. I’m just saying, I’m sharing my own personal experience of what has worked and what’s not worked. This may not work for you.
Reese Harper: When I look at the environment that most of us are in, most of us live in metro areas that are highly populated, densely populated, and the job opportunities for kids are fairly limited. Would you say that is the case in the bright city of Phoenix, Arizona?
Ryan Isaac: Job opportunities are limited for kids?
Reese Harper: For kids.
Ryan Isaac: Like under 16 kids?
Reese Harper: Like real jobs for young children. Yeah. Under 16.
Ryan Isaac: Under, small. You have the context of growing up on a farm where you start plowing fields at three years old, so yes.
Reese Harper: Well, my point here though is more of America used be in a situation where there was more available work. There was more rural land. More households lived in rural areas. The last 40 to 50 years, I mean it’s pushed everyone into suburbs. Farmers have consolidated, instead of having 50 farmers over 50 acres or sorry, 50 farmers over, call it 5,000 acres, you have, one farmer over 20,000 acres. Rural America has kind of some … like if you don’t get the kids out and work on the farm, then you run out of money anyway. So like the kids have to work.
Ryan Isaac: That’s like a normal and it’s not, it’s just not the trend. I remember when I was growing up, I had a friend when we were 14, he got a job at the golf course. He was in charge of collecting the golf balls off of the range and I don’t think he had good equipment for it at that time, but I remember thinking that was pretty crazy, that he had a job at 14. I grew up in the suburbs too and that was insane. So I don’t know what there is for a kid, you know, younger than 16.
Reese Harper: I think the challenge, and this is where I’m getting is … I kind of had this frustrated moment where I’m just, “How are my kids going to ever learn anything about …?” Work translates a lot of things to people, Money and work are impossible to pull apart. If you want to learn about money, you have to learn about work because money doesn’t exist independent of work, and your spending patterns and the way you spend, a lot of it has to do with how hard it was for you to make the money. So if you say, I get $50 for my birthday, and now I’m going to teach my kid about money. Okay, well that money just appeared in thin air. He will make different decisions or she will make different decisions with that 50 bucks than if they had to earn it over an eight hour period of sweeping dirt off of a concrete pad at a 120 degrees.
Ryan Isaac: Oh, can I tell you a story?
Reese Harper: I’d love a story. It needs to be short, but yeah.
Ryan Isaac: Yeah, it does. I know. My 13 year old daughter has a family iPhone and she broke it. She dropped it and cracked a screen.
Reese Harper: By family iPhone, you mean an inherited old iPhone?
Ryan Isaac: It’s like an iPhone 6, it’s the only phone-
Reese Harper: Not the other kind of family iPhone, which is the one the family all shares one phone.
Ryan Isaac: The XR? Yeah. I know. It’s the old 6, that I restrict everything except for texting me and her mom.
Reese Harper: To clarify, she has her own phone. Despite you calling it the family phone.
Ryan Isaac: Yeah. It feels better to say that. It’s her own. So she breaks it and this was like two months ago and then I’m like, “Well you got to figure out how you’re going to pay for the …” I ended up quoting her a price of $150 to get a screen fixed because I haven’t done that in a while. Apparently it’s a lot cheaper nowadays. So what she did is she baked cookies and sold them from door to door in our new neighborhood. It took her like a week. She went out for maybe four hours a day and so she had to sell, it was like 10 dozen cookies or more. Anyway, she earned 150 bucks. It only turned out to cost her $50 and then I made her pay me and her mom for the time my wife had to spend with her driving around and then the ingredients, because that’s how business runs.
Ryan Isaac: But anyway, the point of the story is, she hated it. That $150, it was such a grind and she had to knock doors in the middle of Phoenix summer asking to sell hot cookies to people. People were not nice to her. It’s so true because she was so stingy to the dollar with, “Well how much do I pay mom for driving me? Nine dollars or seven? Because I think it should be seven.” I mean you associate how hard it was-
Reese Harper: You’re really helping me segue into this point that I hope people even stuck around long enough to listen because it’s pretty important here. But like most kids, including my own until maybe a year ago, had this occasional lemonade stand, occasional bake sale. Occasional, “I’ve got a goal to make a certain amount of money to buy something, so I’m going to go find a way to make some money.”
Ryan Isaac: Go grind for week.
Reese Harper: A lot of your kids listening to this, probably do that. They’ve got something they want and you’re like, “Well you got to make money,” and so they go do it and that goes for two weeks. They make a little bit of Skrilla and then they’re back to their same old ways. Living off your hard-earned [crosstalk 00:16:37]. Yeah, they’re living off your hard earned money. I mean maybe I’m an old cranky farmer and that’s my temperament and I need to modernize.
Ryan Isaac: Also possible.
Reese Harper: What I started realizing was okay, it costs a lot for the kids to really do what they want to do. Play with their friends. They want to go boating, they want to go to a movie, they want to play sports, they want to go to a camp, they want to learn a new skill. One of my kids want to go to a bow, like an archery school. One wants to go to art school, one wants to learn the guitar. One wants to play the Banjo. Some of those things are things they want to do and some other things that you’re kind of telling them to do. And so it’s maybe a little hybrid.
Reese Harper: But my point is like, how are you going to teach your kid about money unless there’s work for them to do, but you live in suburbia and you literally have a 10th of an acre and you’re scared to have your kids go outside because they’re going to get run over by a garbage truck. That’s where most of you are at right now. It’s not a safe to let the kid run and roam, and go-
Ryan Isaac: And look for work in suburbia.
Reese Harper: Like what I did was hunt rabbits and take the rabbit pelts into the trading post for a dollar. Ryan’s laughing at me, and so here’s the thing and even like my parents would look at me, they’re probably listening to this right now and laughing because they would look at me and say I was a sheltered young farm kid. I was a modern farmer, because my dad had the 4:00 AM wake up call all year long to haul hay.
Reese Harper: Here’s the point we’re getting at there. I think there’s ample opportunity inside of the house, where most of you are probably either never keeping up with your house. It’s hard to keep up with the house, like organize it, clean it, shop for groceries, get stuff put together, school supplies, organize your supplies, organize your home goods, like organize your house cleaning supplies. There’s a lot of stuff to do around the house and we all kind of neglect it. We all wish that we had a couple of full time assistants around our house to sort of help run kids around, help clean, help make meals. But then we have these kids that are sitting idly on the couch waiting for-
Ryan Isaac: We got the labor. The Labor is there.
Reese Harper: The supply is there, and the demand though is weak. Why is the demand weak?
Ryan Isaac: It’s unorganized.
Reese Harper: Well, because it’s an unorganized system. Like we don’t have a way for the kids to feel like they a need or a want or a desire to sort of like just get up and contribute and do something. I started thinking like, this is like a year and a half ago. I’m like, “Okay, no matter what kind of jobs I assign to my kid, I need to, like if I’m want to teach them about money, they’ve got to have more work because they got to get more money so that they can pay for more actual stuff.” Because if I want them to like really feel the pain of paying for things, like pay for your own cell phone, pay for your own cell phone plan.
Ryan Isaac: And choose between things to pay for, right?
Reese Harper: Yeah. Then they got to make a lot more money. Well, how are they going to make money in today’s world? The only way I figured out how to do it was I just put a really simple spreadsheet together.
Ryan Isaac: It’s probably not simple, lets just be honest.
Reese Harper: It’s not super simple and I won’t share it with you, or it’ll destroy the opportunity for you to-
Ryan Isaac: When Reese Harper says that he’s built a simple spreadsheet, you didn’t build a simple spreadsheet.
Reese Harper: So it’s simple. I’m going to describe to you what to do and you can do this. You just have rows; a big spreadsheet and maybe you have it one tab per kid or just have one spreadsheet with all kids in it. My first two columns are the time they start and the time they get done. So just when you started, when you finished, the next column is it automatically just calculates the minutes. Then I have a column for hourly rate. An hourly rate is something I determined based on how much I like them.
Ryan Isaac: You don’t pay well do you?
Reese Harper: Well, like some people are like $4 an hour and some people are at like, my oldest son, he’s really good now. He started at $7 an hour. He’s at 11 an hour right now, because that’s how much it’s worth it to me.
Ryan Isaac: Quality of work though to.
Reese Harper: Yeah. Like output, quality of work. Like it’s subjective. I’m grading you.
Ryan Isaac: I’m sorry, at five-year-old, you’re terrible at cleaning toilets.
Reese Harper: When they get a rate increase, it really does. It’s motivating because like they make a lot more right than they were making. Then next to the time I just have them type in what they did. So during that, and then I have a list, a big list of like a thousand things they could do. What I started doing was I said, “Okay, I could just pay for chores. But then what about education and what about learning, what about musical instrument practicing?” It was kind of weird because I started like introducing these ideas. My kids are like, “No dad, you can’t pay me for practicing the piano.” I’m like, “Why not actually?” Doesn’t that correlate better to a hard job later in life? You don’t want to practice, you think it’s annoying.
Reese Harper: I’m paying for lessons, so what if I paid him for practicing just the same I would cleaning the yard or something? I started doing that. I just started saying, “Look, piano practicing counts, and your homework counts, and reading books.”
Ryan Isaac: Kids want to come live with Reese Harper now.
Reese Harper: Non fiction counts. My point is like I got to get a way to get them some money because they’re going to have to pay for everything.
Ryan Isaac: Like I’m correlated to actual activities too.
Reese Harper: Yeah, like if they ask me they want to go to a movie, I’m like sure. It’s your money. Or, “Dad, I want to go play with my friends. We’re going to go bowling.” Like, “Okay.” “Dad, I want to go mountain bike at Deer Valley with my friends. I want to go snowboarding.” Well, do you want a season pass, or do you want a date pass?”
Ryan Isaac: No, you’re right. I mean you’re going to give him 10 bucks for bowling or the movie, or 25 for Deer Valley mountain bike, anyway. If you don’t do this, you might as well tie it to a job and then make them pay for it.
Reese Harper: Now I won’t say it’s been easy and we’re still working through it, but man, I am amazed at my 10 year old right now, he’s working in the summer. The last four days, he’s put like … it’s been like eight and a half, nine hours of legit stuff. From lawn mowing to dishes. He’s done the dishes like four times yesterday. He’s hedging, he’s weeding, he’s vacuuming, brooming the floors, cleaning bathrooms, doing laundry. I’m just blown away at this because and it’s all just … My 13 year old is so nice. He feels guilty about tracking it accurately because he’s like making too much money.
Reese Harper: He’s just like, “Dad, like you’re paying me too much.” I’m like, “You pay for everything though. You’re earning it.” Because the truth is, if he went and got a job, he’d probably be making … I mean they’re paying kids $12 an hour right now to work at CoreLife Eatery down the street.
Ryan Isaac: My daughter wants to work at In-N-Out and own one more than anything in her whole life at this point right now.
Reese Harper: Anyway, this probably sounds crazy to some people, but it has been game changing for me to not have to micromanage them every day. Giving them tasks and jobs. They’re just doing stuff more than they were before. It’s not perfect, but it’s moved the needle a lot and now I can have money discussions with them. Like my youngest son who’s 11 years old, he wants to buy a sugar glider, which is some flying squirrel, that lives in doors and it’s like 700 bucks. I’m like, “Well, it’s like your call man. That’s huge. You’re going to have to work like a month to make that or whatever,” two weeks at his rate.
Ryan Isaac: So I’m going to piggyback off that with something I found from Dave Ramsey. I mean Dave Ramsey has some pretty cool stuff for kids. He has an entire course for kids but he has this kind of broken down into age groups. And the one you’re talking about, which is like elementary, middle-schooler kids, there were four points that he made and you just said these, one of them was to show opportunity cost and you can’t do that if you’re just giving an allowance or like you just pay for the movie only after the movie because then he just gets the money.
Reese Harper: That’s why I don’t like allowance, man. I don’t like allowance. I’ll pay for homework.
Ryan Isaac: His second point was don’t pay allowance, give commissions. That’s what he said. And being more organized with it. Maybe like a, you can make this into a template. We could put it in the show notes or something. I probably shouldn’t say that-
Reese Harper: Well, I’ll just build a really simple one. If you want it, I want you to have a dialogue with us about this in our Facebook
Ryan Isaac: What you’re doing, how it works.
Reese Harper: Dentistadvisors.com/group. Tell us what you’re doing that works.
Ryan Isaac: Then we’ll give you a link for it.
Reese Harper: We’ll give you a little link. I’ll make a really simple one for you. Mine’s a little complex. A lot of formulas going on that are probably over the top. I’ve got a really simple one that I actually gave to a client last month.
Ryan Isaac: Okay. That’s what he said, and then another one was avoid impulse buys. Opportunity costs, commissions, impulse buying. I mean, those are just really great lessons that kids can do when they’re trading their time for the money too when they’re having to earn it. Because your kids have to go, “Well, all right, I can go bowling or the movie. Which one do I want to do more?”
Reese Harper: The sugar glider is a real decision for him. And he wanted it like crazy. But the more he’s getting the money piled up, and time has passed and he sees the alternatives and it’s not an impulse. Like the first time he came up with the idea, he literally said the sugar glider needs a buddy. We have to have two or he’ll get depressed and it needs like some carrying cage with air conditioning. It was like two grand worth of stuff for his indoor flying squirrel collection. I still have yet to go on youtube and look at sugar glider pictures.
Ryan Isaac: They’re cool, and I want to make T-shirts now with you riding a sugar glider across the elements table. I think that’d be the coolest thing ever.
Reese Harper: It’s just interesting to me that his passion for that particular item is … it’s interesting. The last couple of days he’s mentioned a few other things-
Ryan Isaac: It’s waning a little bit.
Reese Harper: That rival that.
Ryan Isaac: That’s fascinating.
Reese Harper: Anyway, it’s been really a cool experiment.
Ryan Isaac: So invitation then, like if we just stop and break and we say an invitation here would be, go to the Facebook group. Tell us about what you do. How do you teach your kids or pay your kids? What kind of money lessons are you guys having? And let’s talk about it. We’ll kick you a link maybe with an easy spreadsheet. We can make it a community one. Everyone will build on it or something. Okay. Cool. Reese, let’s take a break right there. Let’s push pause. When we come back from break, we’re going to talk about kind of the more detailed logistical ways, places you can actually put kids savings and types of accounts and things like that when we come back.
Reese Harper: Booking a free consultation is super easy. So why haven’t you done it yet? Just call 833DDS Planner. Go to Dentistadvisers.com and click book a free consultation. You can find a time on your calendar that works best for you. So why hesitate? We can help you take control of your financial future and find out how by going to dentists advisors.com today.
Ryan Isaac: Okay. So let’s jump into more of the logistics of where you can save money for kids and the types of accounts. This is a pretty common question, is like what kind of accounts should I set up for my kids? I’ve answered this so many times that in my head I’ve kind of ranked it, I’ve got a list here. Maybe I’ll give you the list really quick out loud. And then I’ve ranked it from like easiest, least restrictive to more restrictions, more rules. So easiest to more restrictive.
Ryan Isaac: The first one would be you can use a checking and savings account. Like that’s the easiest, less restrictive, the fewest amount of options to do with the money. There’s no tax breaks. There’s no investments you can really hold in a checking account, but like that’s the easiest place you can do. What’s the pros and the cons of a checking and savings account? Well, back to the Dave Ramsey thing, especially when kids, they start really earning money or they get their own jobs at 16, I think it’s fair for them to have some kind of checking account or Venmo account, whatever, so that they can start to get a feel for like more frequent spending. That’d be the advantage of having a checking account wouldn’t you say?
Reese Harper: I like paying my kids with cash and more frequently. So when I was first doing this, I was doing like daily money. Like I get home at the end of the day, show me your chart, show me how many things you got done.
Ryan Isaac: You’re like a boiler room boss.
Reese Harper: Here’s you 26 bucks. It makes a big difference if it’s like really frequent for a while to get the engine going. Now, I’m probably more like once a week, but it’s not like monthly for me. It’s like still weekly. But I think the advantage of checkings and savings accounts, they get a chance to take cash in their pocket, go to the physical bank, see the monetary system at work. Because if you don’t take them into a bank, which most kids have not been into a bank and they were born in the last 10 years, they don’t know anything about the general financial system. For your first time teaching kids, give them cash, let them count money, make sure they know how to divide it and parse it, and decide how to break it up a little bit and put it into their account, and then that’s it.
Reese Harper: I think every kid should have … A lot of your local banks won’t let them have a checking account, but get a savings account set up. And that way at least they can have a place to not lose money because there’s other things … I’ve had my kids lose so much cash.
Ryan Isaac: Oh, I have a kid who is notorious at losing their money.
Reese Harper: Lose a wallet.
Ryan Isaac: She doesn’t even care either. I have daughters and they babysit pretty frequently and people pay them through Venmo. They pay us through Venmo. My kids have a savings account that they can attach to Venmo actually is kind of helpful and more people pay that way. So at some point, kids will listen to this and be like, “What’s a bank? Bitcoin? Is that what you’re …? Pay me in like a fraction of a bitcoin?” Checking and savings, bottom of the food chain. Just the easiest, simplest thing to do. Downsides to those are obviously there’s no tax help. There’s no deferred gains, or taxes on gains. You can’t hold investments in there, so that’s one of them.
Ryan Isaac: The next step up would be a brokerage account, and there’s two ways parents can put money in a brokerage account for kids. It kind of depends what your end goal is. So one way is a parent can open a brokerage account in their name, the parent’s name. And the reason why would they would do this versus their kids’ names is because, and this is actually been an interesting conversation with new clients who saved significant amounts of money in kids’ names in brokerage accounts that are called UTMAs, U-T-M-As and didn’t realize or did and didn’t think about the fact that at age 19 or 21 in some states, that the kid legally, they get notifications from the custodian and the bank like, this is your money. It’s yours. You have control over it.
Ryan Isaac: I’ve had a few clients who have college age kids that got that notice from the bank with like a hundred grand in the UTMA, and they never thought my 19 year old kid shouldn’t get that right now. Parents can open a brokerage account in the parent’s name and if that’s a concern, and avoid that in the future and they can just like kind of put money in their own brokerage account, and then take it out later.
Reese Harper: So to clarify, it’s a regular investment account. Sometimes we call that a brokerage account. Inside of that, you can buy a lot of different types of investments. If it’s in your name, that’s different than if it’s in your child’s name. If it’s in your child’s name, it’s called a?
Ryan Isaac: U-T-M-A, UTMA.
Reese Harper: What’s that stand for?
Ryan Isaac: Uniform Transfer Minors Act something?
Reese Harper: Yeah.
Ryan Isaac: There you go. That’s the official one. I’d pretend to Google it, but I won’t. UTMA.
Reese Harper: Yeah. In some jurisdictions that could be called a UGMA account as well. U-T-M-A and U-G-M-A or UTMA or UGMA. They’re the same type of account. There’s when it’s a huge GMA, it’s called the Uniform Gift to Minors Act and then there’s a Uniform Transfer to Minors Act. There’s like two different way, like two different pieces of law that were written that as an account type for kids, which to me it’s like, I don’t really like we, we see both of those and to be totally honest, like they’re less common than savings accounts and brokerage accounts in parents names or the other types of accounts that Ryan’s going to discuss. But they still are. I would say for people that say for kids, I see 25% of people have these types of accounts.
Ryan Isaac: Yeah. They’re fairly common, and we’ll talk about one of the reasons why they’re more widely used. So here’s what’s different about dentists than the average parent out there is because dentists own businesses that can employ their kids. Now everything we’re going to talk about employing kids and spouses, this is a purely ask your CPA discussion. This isn’t your official piece of advice obviously. It’s up to you and your CPA, but when you pay your kids, that’s when the money they receive does have to go into an account in their name. So you can’t pay your kids and then put it into account like their payroll income into an account in your name. You can’t, it’s got to go into this stuff that they own.
Ryan Isaac: Those are the gives and takes of tax breaks. You pay your kids through payroll, you get the tax break from paying an employee, but in consequence the money, it’s their money like so it has to be in an account in their name. So what’s interesting now, like what you just mentioned is the threshold. I mean in this year, 2019 it was done last year, of what you can pay a kid before they have to file a tax return went from like six grand up to 12, and so what people are doing now is they’re paying the full 12,000 bucks per kid and they’re doing like a Roth IRA, but that can only hold half the money, six grand this year.
Ryan Isaac: So they’re doing a Roth Ira and then a brokerage account on top of that to hold the rest of it. Or they’ll do a Roth, a brokerage account and then a little bit to a checking account so they can have some spending. So that’s a pretty common setup, now with that kind of a threshold, if you pay your kid that much.
Reese Harper: Well and again, your kid does have to be rendering some service that is worth that much money. And a lot of these tasks that I’m talking about that they’re doing for you, a lot of those tasks are household and probably wouldn’t qualify as a business expense, but there’s a lot of tasks that would qualify as business expense that I’m having my kids do. For example, if I have a business vehicle and I’m having my kids clean my business vehicle and service my business vehicle and wax my business vehicle, that is a business expense. I guess there’s a lot of ways in the office through you talking with your CPA … we don’t have time to go through all the options.
Reese Harper: There’s a lot of reasons why kids can get compensated from your business. Some are little less traditional than others. You just need to make sure they’re actually doing something you’d choose to pay your kids competitively. I think it’s a really tax efficient way for you to … for a dentist, to have their kids take a more active responsibility in learning about money.
Ryan Isaac: When you employ a kid through the business, then the money has to go in to an account in their name, which should be checking savings in their name, brokerage in their name, which is the UTMA, UGMA or a Roth IRA. The reason why some people like Roth IRAs and why I would like them is if I employed a kid through a business and put some of that money into their own Roth IRA, especially if that money isn’t necessarily going to be taken up for college but could keep going past college into their 20s and 30s or just be their future retirement, I mean it could be a good chunk of money that’ll just sit there and grow tax free during their lifetime.
Ryan Isaac: Especially if the kids are going to hold it for a longer period of time. I like the Roth IRA option. The last one, I don’t know, bottom or top of scale, I don’t know how we described this, but would be the 529 plan. So as we said at the top of the show, that’s the most common vehicle that parents are using because I think it’s kind of like the most widely known.
Reese Harper: Again, 529 zone, that’s not something that kids are going to be contributing to with their own money. So keep in mind that’s that’s the three that Ryan listed, the brokerage account option could be in your name or the kid’s name, the UGMA or the UTMA is technically in your name, but then will become something that goes into your child’s name at 18. And then the Roth IRA is something that’s in the child’s name. You can’t make contributions to your child’s Roth IRA.
Ryan Isaac: They have to make an income from them.
Reese Harper: They have to make money and contribute it on their own.
Ryan Isaac: Yeah, then the 529 is something that is not in the child’s name. It can be contributed by family members, grandparents. There’s some estate planning with gift taxes for wealthier families with a lot more money that can, I mean you can front load 529 without triggering like gift tax rules. [crosstalk 00:39:02].
Reese Harper: Yeah, we probably have 5% of our clients who have accelerated their annual gift amounts into 529 plans for multiple grandkids and children. It’s a great way to get some money out of your estate so that your estate’s actually worth a little bit less if you have excess wealth. And you know, there are some restrictions to 529 plans that Roth IRAs don’t have or that brokerage accounts don’t have. What are some of those restrictions?
Ryan Isaac: Yeah, so that’s why I put it at the, at the, this part of my list where it’s kind of the most restrictive. The trade-off for 529s, the pros are that there is some estate planning, some front-loading of gifting that you can do if you have the cash to do that. The other one is some states do offer a slight tax break. Every state’s totally different. The thing about 529s is the benefit they give you in your state and your state tax is different in every state. And not every 529 … they’re all administered through the state and not every 529 plan is that great. Some of them have pretty crappy investment options. They’re kind of limited. They still give you a lot of options, and you can use other state’s 529, you just won’t get your state credit.
Reese Harper: Like the one that’s common here in Utah is called my529, and the example that I’ll give just so people can get a sense of what tax breaks are like. Utah’s got one of the best 529 plans probably in the US.
Ryan Isaac: Yeah, it’s ranked one of the highest.
Reese Harper: In terms of it’s low cost. It’s got good investment flexibility. You could have it managed by an advisor. You could have it managed by yourself. You can pick from custom investment models to age-based options. But the state, if you’re a Utah resident, you get a tax credit, not a deduction, you get a credit for a certain amount of contribution that you make. I think this year it’s a little over $2,000 per year, if that is the amount that you’ll get state tax credit for. Which, per child, maybe you’re looking at a few hundred dollars in money that the state’s going to give you back basically on your taxes at the end of the year.
Ryan Isaac: It’s hundreds, not thousands.
Reese Harper: Yeah. But if you’re like in my case where I’ve got four kids, and I’m putting money into the 529 in my state for each child, I’m pushing close to $1,000 of tax credit that I’m getting for those contributions. And that’s pretty meaningful. Over a 15 year funding period, it’s like … and I just met someone yesterday who had been doing the same thing I’ve been doing, but they’ve been doing it inside of a brokerage account and I’ve probably got, 6-7,000 dollars worth of state tax credit that they haven’t received and we’re funding for the same objective.
Ryan Isaac: So the downside though is the flexibility. It has to be qualified education expense. Now the government recently expanded those definitions of qualified education, so some people can use it for like younger kids in school before college. That wasn’t available before, but it has to be qualified education expense in that child-
Reese Harper: It’s pretty liberal though, the types of things you can pay for.
Ryan Isaac: Yeah, I think it is. It can be transferred to a sibling. I don’t know about … I don’t remember rules on blood relatives.
Reese Harper: It could be transferred to any person that you want.
Ryan Isaac: Not blood relative only?
Reese Harper: Yeah, it’s not blood relative only. In my mind, if you’re going to use money for school, like that’s the place to put it. If you have a certain amount that you want for education, that’s probably the place to put it. Just because the Roth IRA can be just as advantageous, but it has some annual waiting, had some waiting periods before-
Ryan Isaac: For the gains, yeah, when you want to take your gains out.
Reese Harper: For the gains in your account, to pull them out for education. Roth IRAs do have exclusions for gains when it comes to education, medical expenses-
Ryan Isaac: Gains are free.
Reese Harper: And first time home purchase and a few other things, but you still have to have a vesting period of … I think it’s five years?
Ryan Isaac: Five years.
Reese Harper: And 529 plans are immediate. What I do in my own personal planning, is I say, this is how much money I want to have for each kid by the time they turn 18, for school. In my own case, like right now, I’m only funding to about $36,000, because that’s about the maximum amount I could possibly envision giving my kid for school, because I’m not trying to pay for them to go to Brown University. I’m trying to pay for them to get state tuition and rent. Like in today’s education market for undergrad, my current philosophy, and I could be drastically underestimating the value of my undergrad, but I feel like if you’re going to put the money, put it into Grad school,
Ryan Isaac: Yeah. Don’t over pay for undergrad stuff.
Reese Harper: Just with how dynamic education is changing right now. So for me, I’m funding to a certain amount and when I started funding, each kid was a little bit different in age. So I had to do is I’d take the amount that I needed by the time they were going to be 18. I divide that by their current age. And then each kid, I’m just putting in a different amount of money per child. Who knows, I might drop that too where I say, “I only want to do 25,000, or 27.”
Ryan Isaac: I mean back to what we were saying before, this is really like, it’s such an individual thing because a lot of people don’t have the discretionary income until later in career anyway when your kids are teenagers.
Reese Harper: I didn’t really tell [crosstalk 00:44:50].
Ryan Isaac: Exactly. And a lot of parents are just saying, “All right, I’m just going to open a brokerage account in our own name and we’ll just like see who gets scholarships, who doesn’t. We’ll just try to put what we can and we’ll shell out.” A lot of parents just like those studies from earlier, they just plan on cash flowing, because again, income will be higher at that point in your life than it is today. And a lot of people just plan on cash flowing some stuff as they see it. But see that’s the trap though, because I think everyone feels that way. But then the study comes out from Merrill Lynch that 79% of parents are still paying for adult children.
Reese Harper: Well, I think the point I wanted to make today that’s broader than just are you saving up enough for college, I think is, are you conditioning your kids to understand money and have some financial autonomy or are they not learning about money the same way you naturally did? Because my gut is that you, the parent, learned different lessons than your kids are learning now. How are you going to artificially try to create some of those same lessons in their lives that maybe you had, that they’re not getting because of the way our economy’s changing because of where we live, because of the job opportunities, because of the services we have.
Ryan Isaac: I would give two invitations from today’s episode then, on the heels of what you were just saying. I would suggest that in order for parents to be able to teach kids about money, there’s definitely like a trade-off relationship with work and earning that needs to happen. But would say that unless parents also understand how money is working in their own lives, which only comes when you’re organized enough to see it, like where does your income go every year? There’s four places you can save it, spend it, tax and debt. How is your own net worth building? Where does your money go? How does it get spent? How does it come in? I would say that if parents don’t understand that in an organized way in their own life, that should probably be the first place they would start. Which is our whole job.
Ryan Isaac: That’s what our company does, is help organize people to the point where they can see all those moving pieces. So that’d be one invitation is like if you’re really wanting to teach your kid this stuff, but you’re also feeling like, “Well, my own stuff’s kind of a mess and I don’t really know,” then call us and let’s have a chat about your whole big picture so that you can have some more context and insight to pass along that advice. The second thing would be, and we mentioned this earlier, is paying for kids’ college and having that money set aside for kids.
Ryan Isaac: I mean that does come at the expense of yourself of saving for yourself. And so you have to be organized enough to know where your own future is headed. How is your own net worth growing? How is it comprised? What can you reasonably assume it to be at age 50, 60, and 70 before you can feel comfortable enough to start supporting adult kids or start putting away money early enough?
Reese Harper: Yeah, I totally agree with that. I mean first you got to take care of your own stuff. No question.
Ryan Isaac: Put the oxygen mask.
Reese Harper: Yeah, you’ve got to take care of yourself first. Second thing, I do think though that if you’re not preparing to help cover the cost of your kid’s undergraduate education at some level, you’re just going to be writing checks. I mean, in today’s world, like you just saw the Merrill Lynch studies, you’re going to be paying for this stuff at some point.
Ryan Isaac: Well, probably, yeah. We’re not an exception. Majority of people are doing it.
Reese Harper: So it’s likely that you will, so once you get your own house in order, get going on some kind of savings track to at least get a modest amount put away and take advantage of the state tax credits or the tax deferral and the investment growth that comes. And I wish the federal government could give us a little bit more incentive to contribute to these 529 plans than we have. I mean, the incentive’s not super strong. It’s just kind of a little bit better than a brokerage account.
Ryan Isaac: You work on that. In the meantime, if you have questions about your own situation, how kids savings applies to your own retirement plan and net worth and income, just give us a call. Let’s talk about it. This is what we do all day long for hundreds of dentists all over the country. We are experts at this stuff. Just go to dentistadvisors.com, click on the big green button that says book consultation, or what does it actually say? Book free consultation?
Reese Harper: Yeah.
Ryan Isaac: I think that’s what … it’s a big button.
Reese Harper: We’ve tested it. I think that’s got the best performance.
Ryan Isaac: That’s the best wordage. So just click that button. Let’s talk, schedule something on one of our advisers calendars and go to our group post questions. We’d love to hear what you guys do in teaching your kids money. It’s dentistadvisors.com/group it’s our free Facebook group. Thanks for listening to everybody. Catch you next time.
Reese Harper: Carry on.Saving