MONEY the photo bank

The Costs of Bringing Up Baby

One of the first things you find out as an expecting parent is that the receipts for kid-related spending start piling up almost before you receive confirmation from the pregnancy test. Soon after, it becomes clear that debits from your account will rack up for at least the next 18 years. According to the USDA report Expenditures on Children and Families, “a middle-income family with a child born in 2013 can expect to spend about $245,340 ($304,480 adjusted for projected inflation) for food, housing, childcare and education, and other child-rearing expenses up to age 18. Costs associated with pregnancy or expenses occurred after age 18, such as higher education, are not included.” For some parents, these costs will continue well after your little one receives the college diploma.

The photographers presented in this week’s Photo Bank gallery document the bringing up of baby to adulthood. While none of these artists specifically tackles the financial costs of raising a kid, they all intimately explore the tipping of the scales that occurs as children grow from dependents to independents over time. Here, images from their varied projects are presented with some statistics of costs that are above and beyond the USDA report.

What this collection of photographs makes clear is the psychology behind why the costs of child-rearing are so high. Phillip Toledano, for example, explores the anxiety-addled brains of new parents who are fraught with self-doubt and fear of the unknown. Toledano struggled to become comfortable with the massive changes that came with the birth of his daughter; his photos capture the new father’s progression from feeling detached to enjoying a close relationship with his child as she grew.

Other artists like Jamie Diamond and Julie Blackmon act out moments that are part autobiographical and part fictional. Diamond poses herself in vignettes with a baby doll to explore the mother-child relationship. Blackmon stages multi-layered scenes of family life that have a strange, wry, or whimsical twist—juxtaposing an enduring sense of nostalgia with keenly contemporary details. Colie James, Ginger Unzueta, and Kelsey Hunter document through still-lives what is left behind by a child’s fleeting presence—rearranged toys on shelves at a store, half-eaten peanut butter and jelly sandwiches, a handful of baby teeth. James Ransom explores the interiors of a school his kids passed through before graduating to their next class. Mark Nixon heroicizes much-loved and well-worn teddy bears, and child-at-heart Alex Eylar plays with Legos and reconstructs popular movie scenes with them.

Rebecca Greenfield, Gillian Laub and Amy Anderson explore rites of passage into adulthood like proms, bar and bat mitzvahs, and quinceañeras. Brian Finke documents with wit college tailgaters at Ole Miss—a time when children are “free” from their parents and exercise their own independence. Damon Casarez portrays those “boomerang kids” who, despite finishing college, are forced to move back in with their parents out of financial necessity, and Julien Mauve poses family and friends in scenes with his childhood toys to explore how our sentimentality for them continues into adulthood.

These images illustrate the love for one’s children that drives even the most frugal of parents—the ones who swore pre-parenthood they would never, ever spoil their child—to get so excited by their baby’s interest in Goodnight Moon that they buy her a board book collection that rivals the Library of Congress. And who, so flustered and exhausted they try to drink their coffee out of the baby bottle, just need the happy image of their Peanut sporting a cool pair of Babiators to will themselves awake at 2 a.m. and put her back to sleep for the fifth time that evening. They explore how the initial fear and self-doubt about being prepared for parenthood and building the perfect nest continue well beyond the first months. Those are compiled with new long-term concerns: making sure that their child has what he or she needs to thrive academically and socially, and preparing their teen to eventually leave the nest and finally come into being as an adult.

Related:

Looking at ‘Rich and Poor,’ 37 Years Later
Inside the ‘Pay What You Want’ Marketplace
The Costs of Raising a Second Baby (Who’s Not a Prince)

This is part of The Photo Bank, a new section of Money.com dedicated to conceptually-driven photography. From images that document the broader economy to ones that explore more personal concerns like paying for college, travel, retirement, advancing your career, or even buying groceries, The Photo Bank will showcase a spectrum of the best work being produced by emerging and established artists. Submissions are encouraged and should be sent to Sarina Finkelstein, Online Photo Editor for Money.com: sarina.finkelstein@timeinc.com.

MONEY Kids and Money

The Surprising Place Your Kid Should Save His Summer Earnings

Pitcher of lemonade and a money jar
Your teen's summer earnings may not seem like much now, but they can serve as a cornerstone for his retirement 50-odd years in the future. Somos/Veer—Getty Images

Get your teen started off now in a Roth IRA for a big payoff down the road, says financial planner Kevin McKinley.

A few weeks ago, I wrote about how to figure out how much money you need to become financially independent, and how the process could help you teach your kids to reach the same goal.

But talking the talk only goes so far. You can walk the walk by helping them start saving for retirement in…drumroll, please…a Roth IRA.

Why a Roth IRA?

For most younger workers, the Roth IRA is preferable to a traditional IRA for two reasons.

The first is that contributions to a Roth IRA can be withdrawn at any time for any reason with no taxes or penalties whatsoever. Therefore, that portion of the account can be taken out for other expenses, such as college or a down payment on a house, without a severe cost.

The second reason the Roth IRA rules is that younger workers typically are in a low tax bracket, and therefore don’t need the deduction that a traditional IRA provides. But once they get to retirement, all the money in the Roth can generally be withdrawn with no taxes at all.

How much your kid can save

Children of any age can open a Roth IRA account—as long as they have legitimate earned income. Flipping burgers and bagging groceries certainly counts, but so does self-employment like babysitting and yard work, especially if it’s done for someone other than you.

Just make sure to keep track of what your kid makes so you know how much can be deposited in to the Roth IRA. For 2014 the contributions to a Roth IRA are limited to the lesser of the kid’s earnings, or $5,500.

Technically, for the 2104 tax year, the money doesn’t have to be deposited until April 15, 2015, the usual deadline for the federal income tax filing.

What you can do to encourage him

Congratulations to you—and your child—if you can convince her straightaway to put her hard-earned paychecks into an account that isn’t meant to be tapped for another 50 years.

But even if you can’t immediately get your teen into the savings habit, you may be able to motivate her by using some of your own money. The money for the Roth IRA doesn’t necessarily have to come from her. She can spend her earnings, and you can deposit into the Roth on her behalf.(Just remember that your deposits then become her money, and she’s free to do with it as she pleases once she reaches adulthood.)

Also, keep in mind that the source of the deposit to your child’s Roth IRA doesn’t have to be an all-or-nothing proposition. You may want to tell your kid that you will match every dollar she contributes with one of your own.

For further motivation, try showing your child how time can turn a relatively-small amount of money into a small (or large) fortune.

For instance, let’s say you and your child deposits $5,000 into a Roth IRA when he’s 15 years old, and it grows at a hypothetical annual rate of 6% per year.

By the time he’s 65 (and it will happen sooner than he thinks), the account would be worth over $92,000.

But if he has the earnings and discipline required to set aside $5,000 in to the same account every year until he turns 65, the Roth IRA will provide him with a tax-free total of $1.6 million.

And if that doesn’t get his attention, no amount of walking and talking will.

__________

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley

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The Simple Formula That Can Help You Achieve Financial Independence

MONEY financial independence

Financial Lessons of America’s Founding Fathers

Benjamin Franklin on hundred dollar bill
Roman Samokhin—Fotolia via AP

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation.

In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.

Here are some of the lessons, still applicable today, that can be drawn from these historic financial lives.

Have a Back-up Plan

Alexander Hamilton may have been the greatest financial visionary in American history. After the Revolutionary War, as Washington’s Treasury Secretary, Hamilton steered the fledgling nation out of economic turmoil, ensured the U.S. could pay back its debts, established a national bank, and set the country on a healthy economic path. But it turned out that he was far better at managing the country’s finances than his own.

When Hamilton was killed in a duel with vice president Aaron Burr, his relatives found they were broke without his government salary. Willard Sterne Randall, biographer of multiple founding fathers, recounts that Hamilton’s wife was forced to take up a collection at his funeral in order to pay for a proper burial.

What went wrong? Hamilton’s law practice had made him wealthy and a government salary paid the bills once he moved to Washington, but he also had seven children and two mistresses to support. Those expenses, in addition to his spendthrift ways, left Hamilton living from paycheck to paycheck.

The take-away: Don’t stake your family’s financial future on your current salary. The Amicable Society pioneered the first life insurance policy in 1706, well before Hamilton’s demise in 1804, and term life insurance remains an excellent way to provide for loved ones in the event of an untimely death. Also, don’t get into duels. Life insurance usually doesn’t cover those.

Diversify Your Assets

Conventional wisdom holds that investors shouldn’t put all their eggs in one basket, and our nation’s first president prospered by following this truism.

During the early 18th century, Virginia’s landed gentry became rich selling fine tobacco to European buyers. Times were so good for so long that few thought to change their strategy when the bottom fell out of the market in the 1760s, and Jefferson in particular continued to throw good money after bad as prices plummeted. George W. wasn’t as foolish. “Washington was the first to figure out that you had to diversify,” explains Randall. “Only Washington figured out that you couldn’t rely on a single crop.”

After determining tobacco to be a poor investment, Washington switched to wheat. He shipped his finest grain overseas and sold the lower quality product to his Virginia neighbors (who, historians believe, used it to feed their slaves). As land lost its value, Washington stopped acquiring new property and started renting out what he owned. He also fished on the Chesapeake and charged local businessmen for the use of his docks. The president was so focussed on revenues that at times he could even be heartless: When a group of revolutionary war veterans became delinquent on rent, they found themselves evicted from the Washington estate by their former commander.

Invest in What You Know

Warren Buffett’s famous piece of investing wisdom is also a major lesson of Benjamin Franklin’s path to success. After running away from home, the young Franklin started a print shop in Boston and started publishing Poor Richard’s Almanac. When Poor Richard’s became a success, Franklin reinvested in publishing.

“What he did that was smart was that he created America’s first media empire,” says Walter Isaacson, former editor of TIME magazine and author of Benjamin Franklin: An American Life. Franklin franchised his printing business to relatives and apprentices and spread them all the way from Pennsylvania to the Carolinas. He also founded the Pennsylvania Gazette, the colonies’ most popular newspaper, and published it on his own presses. In line with his principle of “doing well by doing good,” Franklin used his position as postmaster general to create the first truly national mail service. The new postal network not only provided the country with a means of communication, but also allowed Franklin wider distribution for his various print products. Isaacson says Franklin even provided his publishing affiliates with privileged mail service before ultimately giving all citizens equal access.

Franklin’s domination of the print industry paid off big time. He became America’s first self-made millionaire and was able to retire at age 42.

Don’t Try to Keep Up With the Joneses

Everyone wants to impress their friends, even America’s founders. Alexander Hamilton blew through his fortune trying to match the lifestyle of a colonial gentleman. He worked himself to the bone as a New York lawyer to still-not-quite afford the expenses incurred by Virginia aristocrats.

Similarly, Thomas Jefferson’s dedication to impressing guests with fine wines, not to mention his compulsive nest feathering (his plantation, Monticello, was in an almost constant state of renovation), made him a life-long debtor.

Once again, it was Ben Franklin who set the positive example: Franklin biographer Henry Wilson Brands, professor of history at the University of Austin, believes the inventor’s relative maturity made him immune to the type of one-upmanship that was common amongst the upper classes. By the time he entered politics in earnest, he was hardly threatened by a group of colleagues young enough to be his children. Franklin’s hard work on the way to wealth also deterred him from excessive conspicuous consumption. “Franklin, like many people who earned their money the hard way, was very careful with it,” says Brands. “He worked hard to earn his money and he wasn’t going to squander it.”

Not Good With Money? Get Some Help

In addition to being boring and generally unlikeable, John Adams was not very good with money. Luckily for him, his wife Abigail was something of a financial genius. While John was intent on increasing the size of his estate, Abigail knew that property was a rookie investment. “He had this emotional attachment to land,” recounts Woody Holton, author of an acclaimed Abigail Adams biography. “She told him ‘Thats all well and good, but you’re making 1% on your land and I can get you 25%.’”

She lived up to her word. During the war, Abigail managed the manufacturing of gunpowder and other military supplies while her husband was away. After John ventured to France on business, she instructed him to ship her goods in place of money so she could sell supplies to stores beleaguered by the British blockade. Showing an acute understanding of risk and reward, she even reassured her worried spouse after a few shipments were intercepted by British authorities. “If one in three arrives, I should be a gainer,” explained Abigail in one correspondence. When she finally rejoined John in Europe, the future first lady had put them on the road to wealth. “Financially, the best thing John Adams did for his family was to leave it for 10 years,” says Holton.

As good as her wartime performance was, Abigail’s masterstroke would take place after the revolution. Lacking hard currency, the Continental Congress had been forced to pay soldiers with then-worthless government bonds. Abigail bought bundles of the securities for pennies on the dollar and earned massive sums when the country’s finances stabilized.

Despite Abigail’s talent, John continued to pursue his own bumbling financial strategies. Abigail had to be eternally vigilant, and frequently stepped in at the last minute to stop a particularly ill-conceived venture. After spending the first half of one letter instructing his financial manager to purchase nearby property, John abruptly contradicted the order after an intervention by Abigail. “Shewing [showing] what I had written to Madam she has made me sick of purchasing Veseys Place,” wrote Adams. Instead, at his wife’s urging, he told the manager to purchase more bonds.

Make A Budget… And Stick To It

From a financial perspective, Thomas Jefferson was one giant cautionary tale. He spent too much, saved too little, and had no understanding of how to make money from agriculture. As Barnard history professor Herbert Sloan succinctly puts it, Jefferson “had the remarkable ability to always make the wrong decision.” To make matters worse, Jefferson’s major holdings were in land. Large estates had previously brought in considerable profits, but during his later years farmland became extremely difficult to sell. Jefferson was so destitute during one trip that he borrowed money from one of his slaves.

Yet, despite his dismal economic abilities, Jefferson also kept meticulous financial records. Year after year, he dutifully logged his earnings and expenditures. The problem? He never balanced them. When Jefferson died, his estate was essentially liquidated to pay his creditors.

 

MONEY Kids & Money

8 Ways to Teach Your Kids to Be Financially Independent

Kid learning to use abacus
When it comes to money management, your child can't do this alone. Laurence Dutton—Getty Images

Want your children to develop good money habits for life? Then teach them well from the start. Use these tips from parents and top personal finance experts as your lesson plan.

To help your kids master essential money skills—and some day break free from you—devote time to financial home schooling. Parents are the biggest influence on their children’s financial habits, more so than work experience or financial literacy courses, according to the National Endowment for Financial Education. For ideas on how to do this, see how personal finance and parenting bloggers and authors teach their kids.

1. Tie a “No” Today to a “Yes” Tomorrow

“My wife and I have three children, ages 6, 4, and 2. While they are still a little young for in-depth money lessons, we make a point to involve them in family finances and try to make talking about financial responsibility and independence a part of our daily life. This usually happens in a thousand little, ordinary ways. An instance that comes to mind is when my four-year-old son asked if we could go to a local pizza and games restaurant that he loves. I said no, but went on to explain to him that it costs a lot of money for our family to enjoy an evening there. I reminded him of our vacation in a few months and said we were saving up so that we can have a lot of fun on our trip. It was a good way to teach him about the important principle of delayed gratification and the lesson that sometimes you have to say ‘no’ to things you want now, to enjoy better things in the future.” —John Schmoll, Jr., Frugal Rules

2. Let Them Make Spending Mistakes

“From the time our children were three or four years old, we’ve given them opportunities to earn money by doing chores and projects. When we’re out shopping, they can bring their own money and spend it however they’d like (within reason!). Not only do they learn money management skills, but this helps prevent the ‘gimme’ attitude. If a child sees something they want and asks if we can buy it, I always respond, ‘Do you have enough money for it?’ It also gives them the chance to make money mistakes. They’ve learned valuable lessons when they’ve purchased cheap items that broke almost immediately, and we’ve had great discussions on how to make wise purchases. We’d much rather they made $3 mistakes when they are little to hopefully prevent some $3,000 and $30,000 mistakes down the road.” — Crystal Paine, MoneySavingMom, author of Say Goodbye to Survival Mode?

3. Show Them That Work is Rewarding

“’I get an M&M mama?’ my talkative toddler asks. I reply, ‘Yes, if you complete the job.’ Even at 2 1/2 years old, I’m attempting to lay financial foundations in my son’s life. At this age, he doesn’t care a thing in the world about real money, but when I break out the M&Ms he knows I mean business. That’s because chocolate is a special treat reserved for a reward. At this stage, candy talks, and I can teach my son about finances with food. He is learning that when he uses the potty, picks up after himself, or helps me with a chore, he is paid for his work in delicious, color-coated chocolate candies. He’s beginning to understand that hard work is rewarded. That’s a trait my parents instilled in me, and I desire to pass along. Cash and chore charts will eventually replace sweets, but until then, candy paychecks are perfectly fine by him. Coins just don’t taste as good.” — Kim Anderson, Thrifty Little Mom

4. Break Out the 24-Hour Rule

“I’m blown away that my teenage daughter still remembers going to the flea market together years ago and learning a cool buying lesson from her mom. (As all us moms know, this is a rare and exotic occurrence!) Though I liked a pair of earrings, I waited a day to think it over, knowing that they would likely still be there if I changed my mind. Sure enough, after a day of thinking about it, I realized they weren’t all that special and that I’d rather wait to get something that I loved. To this day, whenever my daughter and I are out shopping and can’t make a decision, we invoke the ’24 Hour Rule.’” —Beth Kobliner, author of the forthcoming book Make Your Kid a Money Genius (Even If You’re Not) and a member of the President’s Advisory Council on Financial Capability for Young Americans.

5. Connect Saving, Spending, and Giving From the Outset

“My wife and I have a four-year-old son, and we’re just now beginning to teach him the true value of money and how it is a tool to be used for different purposes. We’re doing that through the use of three money jars. When he earns money through little jobs we have given him, depending on the day he will put the money in one of three jars. One day for giving, one for saving, and one for spending. On the last day of the week he can choose which jar to put his money in. He can never buy anything unless he has the money available in the spending jar. He also sees importance of saving for the future, and the joy of giving to others. It’s truly a joy to see when the ideas of giving and saving start to register, and it’s so fun to see the smile on his little face when he’s giving to our church, or to a friend through his giving jar. — Peter Anderson, Bible Money Matters

“Our kids are still very young, but at ages 3, 5, and 6 we’re doing our best to teach them the importance of spending, saving, and giving. Last summer, we made piggy banks as a family, and each child has three in their bedroom. One for saving, one for spending, and one for donating. Anytime they make money at a lemonade stand or receive birthday money, they split it up equally among their three jars. It’s not a huge act, but it does start the process at a young age that it’s okay to spend some of your money, as long as you’re giving back to others and saving as well.” — Anna Luther, My Life and Kids

6. Show Them the Price—and the Path

“We have young kids, but we’ve started occasionally working with our five-year-old daughter, Kate. One day while shopping with us she discovered My Little Ponies and asked if she could have one. We explained that we were planning on using our money for other things right now (a phrase we prefer to ‘we can’t afford it’). We shared with her that we would love to help her earn the money to buy it herself. We told her to write down the price and start saving money for it. Over the next couple of weeks we gave her little odd jobs to do around the house to earn the money, quarters and dimes at a time. She worked hard until she’d saved enough. Then we went to the store, and she got to buy her pony. She was so proud. It was a great lesson in money math, delayed gratification, and the power of saving.” — Philip Taylor, PT Money

7. Talk About Debt, Too

“My two boys aren’t quite old enough for serious money lessons yet, but one thing I’m excited to teach them early on is the importance of smartly managing debt. If they want to buy something on their own, like a toy, they’ll have three choices: 1) Buy it now, 2) Save to buy it later, or 3) Borrow money from us. If they choose to borrow, they’ll have payment terms and interest just like a regular loan. My hope is that they can learn the consequences of debt, both good and bad, before it has any real-world implications for them and without the lectures and scare tactics. Then they’ll have the skills and experience to make smarter choices once they’re out on their own.” — Matt Becker, Mom and Dad Money

8. Make Them Work for Wants

“A key factor in reaching financial independence is what you spend. Some spending is needed and necessary. But it’s the ‘wants’ that can get people in trouble. Therefore, when our kids ask for a non-essential item, we reply with a two-step plan: 1. First, wait a week. If you still want it, we’ll get it then (most times the ‘want’ goes away by the end of the first day); 2. If you still want it after the week passes, you have to work around the house to earn half of the purchase price—even if you have enough in savings to pay for it. The second step forces them to think if the amount of work required to purchase the item is worth it to them. If they follow through with the required work, then we know that they’re serious about the purchase, rather than just expressing a fleeting, short-term desire.Several times the “acquiring of money to pay for the thing” becomes almost exciting as the actual purchase.” — Kevin McKinley, On Your Money

More on helping your kids become financially independent:

 

 

MONEY Portfolios

The One Thing You Have to Know to Invest on Your Own

You don't need pricey money managers to help you buy low and sell high.

With the 4th of July on the way, the editors here at Money.com asked me to think about what it takes to become an independent investor.

I’ll take “independent” to mean something that most people with a 401(k) or an individual retirement account can realistically do. I’m not talking about sitting at your desk all day trading your own portfolio of stocks. In fact, the way I think about independence, you’ll want to automate about 99% of the investment decisions in your portfolio — specifically, which individual stocks and bonds to hold. The independence that matters has nothing to do with security selection. It’s about cutting out costly middlemen, from advisers who help you select investments, to the managers who pick the securities inside the mutual funds you may hold.

The rewards to doing this are significant. A high-cost mutual fund may shave 1% or more off of your investments each year, which can easily add up to six figures in fees and foregone gains over a lifetime as an investor. Eliminating layers of management also means you are less exposed to the quirky risks someone else might take with your money.

You don’t need a lot of time or expertise to pick these middleman-free investments. You can build a portfolio that holds a diversified slice of stocks and bonds with just three index mutual funds, portfolios that mimic the composition of the overall market at very low cost. If stocks rise 8% in a year, you’ll earn 8% or very close to it. You very likely have index options in your 401(k) plan—if not, say something to your HR manager!—and index funds are easy to buy in an IRA.

Below is what that portfolio might look like. You can adjust the split depending on you appetite for risk, but the one below is a good starting point for many long-term investors saving for retirement. (The less you can stand to lose, the more you’d add to the bond fund.)

image(28)

In contrast to typical funds, this portfolio will cost you less than 0.1% of assets per year, and will get with three easy decisions exposure to literally thousands of stocks. You can choose index funds from our Money 50 list of recommended funds.

It’s easy to say that anyone can do this, of course. But I think a lot of people lean on investment middlemen because they aren’t sure they know enough about investing to do it themselves, and even if they want to learn, they aren’t sure which knowledge really matters. There’s so much you could dive into: stock sectors, “P/E” ratios, the January effect, EPS growth, upside earnings surprises, etc., and etc.

So here’s the one thing I think you have to understand to be a competent, on-you-own investor: Where the return on your investments really comes from. And the answer is that, for stocks, it comes from two sources. You own businesses, and you are taking a risk to do so.

Beginners are often introduced to the market with the old saying, “buy low and sell high.” This isn’t wrong (doing it the other way sure won’t feel good), but it’s not at all helpful. It makes investing sound a like a game of wits against other investors — first you figure out when a stock is too low, and then sell it when somebody else is willing to buy it for more than its worth. That’s hard, and you have to learn a lot about companies, accounting and human psychology to even attempt it. The whole edifice of the middleman money management business is built on the fact that most people believe they can’t do this themselves, or don’t want to.

But to be a buy-and-hold index investor, you can throw out “buy low/sell high” and the game-playing thinking that tends to go with it. This isn’t about finding a greater fool to buy your stock further down the road. Owning stocks gives you a claim on the earnings of companies. As an owner, you make money over time either because you are being paid a dividend out of profits, or because profits are being reinvested in the business to make it more valuable. Index funds give you a share in the future profits of the America’s, or the world’s, public companies. It’s almost as simple as that. Almost.

The other, crucial part of the equation is that the earnings of companies are uncertain and so are the cash flows shareholders will get. Stock investors get no promises that a company will ever earn enough to produce a dividend. Investors typically bake that risk into the market price of stocks, so that they can hope to be compensated with a higher return than they’d get on bonds. Historically, stocks have earned about 4.5 percentage points per year above bonds. Stock investors have on average been paid for risk — but that doesn’t mean you’ll always get paid for risk. Case in point: The nearly 50% loss investors took on blue chip stocks in the wake of the financial crisis.

If you get that, you have the baseline knowledge you need to build a diversified portfolio and stick with it. The potential for loss is built into stock investing and you only make money if you are willing to live that. The rest is (usually expensive) fiddling around the edges.

MONEY

Is Living with Mom and Dad Starting to Cramp Your Style? Take These Steps to Independence

You promised yourself the situation would be temporary. But now six months has rolled into a year, and the free rent, home-cooked meals, and regular laundry service make it tough to say goodbye. According to Pew Research, 36% of young adults (to age 31) were living with their parents last year—the highest percentage in at least four decades.

How do you cut the cord? View your time at home as an opportunity for a practice round of managing your money. Then get ready to ditch the training wheels.

Pay Part of Your Way

Living at home enables you to save money, but that doesn’t mean you’re entitled to a totally free ride. Once you find a job, start contributing a portion of your salary toward household expenses. It will help you get in the habit of setting aside money for rent. Plus, kicking in a little cash is only fair: Your parents are probably saving for retirement and may not have factored the cost of your coming home for an extended stay into their budget.

How much is reasonable? First, get an estimate of their household bills, from groceries to the mortgage. “Ask how much they pay for car and home insurance instead of just having a vague sense it’s all being taken care of,” says Vivian Diller, a family psychologist. Then figure out a fair percentage you can afford to pay. This exercise will give you a better idea of the costs involved with living on your own. Bonus: Having to pitch in for their bills might motivate you to move out sooner rather than later.

Get Your Finances in Order

Take advantage of your lower cost of living to build an emergency fund and pay down debt, especially credit cards (average balance of recent grads: $4,100). In addition to freeing up cash, paying off the plastic will help boost your credit score, says Gerri Detweiler, director of consumer education at Credit.com, “so you’ll be in a better position to get good rates on mortgages and car loans later on.”

Plan an Exit Strategy

Set a deadline for your departure, then plot out the interim steps needed to meet it, suggests Elina Furman, author of Boomerang Nation. Say you’re aiming to be out in six months. Calculate how much to save each month so that you’ll have enough for furniture costs and the security deposit on an apartment. Then, three to four months in, start scouting for rentals.

Budget feeling tight? Maybe your parents can help with a short-term loan to pay some initial bills. If they’re amenable, draft an agreement stating the terms, including when you’ll start to repay and how much each month. It’s good practice. “Once you’re on your own, you’ll deal with due dates and contracts all the time,” says Detweiler. “Real-life creditors aren’t as forgiving as Mom and Dad.”

 

More on Financial Independence

4 Ways to Lighten Your Kid’s Debt Load

7 Ways to Get Your Kid Out of Your Basement

Taking Five Years to Earn a B.A. is Common—And Costly. Here’s How To Get Out in Four

MONEY

The Simple Formula That Can Help You Achieve Financial Independence

Man writing formulas on a chalkboard
You don't need a Ph.D. in math—or even a chalkboard—to figure out if you're on the path to financial independence. Justin Lewis—Getty Images

Your ability to retire well depends not on how much you save but on how much you spend, says financial planner Kevin McKinley.

As you’re celebrating our nation’s independence this weekend, you might want to spend some time—between your first and second hot dogs, maybe?—contemplating how well you’re doing in achieving your own financial independence.

Your ability to reach a comfortable retirement has less correlation than you might expect with how much money you earn, how much money you already have, or how you invest that money.

Instead, it depends upon how much you spend—and how much you plan to spend in the future. The more money you spend now and going forward, the more you will need to accumulate to support your lifestyle.

A simple formula can tell you not only how much you will need, but also how close you are now to getting where you want to be.

What’s your destination?

Start by looking back on the last month to see how much you’ve spent. You can do this by reviewing your checking and credit card account statements, or you could use an expense-tracking program like You Need a Budget or Mint going forward a month.

Once you have a handle on a typical month’s spending, subtract any Social Security payments you and your spouse or partner expect to receive in retirement (find estimated amounts at the Social Security website). You can also subtract any pension payments you know will be coming your way.

Then multiply the remaining amount by 200. The result is what you will need to have in savings, investments, and retirement accounts before you can retire comfortably.

Or, in a formula:

(Monthly Spending – Expected Monthly S.S./Pension) x 200 = Target Retirement

So, if you’re spending $4,000 per month and can expect $1,500 per month in Social Security retirement benefits, your net required liquid assets are $2,500 x 200, or $500,000.

Are you on track?

You can use a similar variation of this formula to see how you’re doing toward your goal. Again, start with your typical monthly expense amount. Here’s where you should be…

In your 20s: Current Monthly Spending x 10

In your 30s: Current Monthly Spending x 25

In your 40s: Current Monthly Spending x 50

In your 50s: Current Monthly Spending x 100

(By the way, in case you plan on winning the lottery well before retirement age and want to be financially free forever, you’d better hope you hit the Mega Millions, since you’ll need about 300 times your monthly expenses.)

If your net worth isn’t where it should be, don’t panic. Instead, go back to your list of expenses to see what is less important to you than your long-term financial security, and try to reduce or eliminate it. A quick way to increase your net worth and reduce your spending is to bump up your deferral in to a pre-tax retirement plan, like an IRA, 401k, or 403b. The money is still yours, but since you’re taking home less, you’ll be forced to live on a little less (and you can always change it back).

Bonus: Saving more for retirement this way also means you’ll pay less in taxes each year.

Will your kids be on track?

Best of all, this process can help you provide a priceless lesson to your children.

Many of us want our children to have high-paying jobs in adulthood so that they can cover their own living expenses with as little parental assistance as possible.

But simply by learning that it’s easier to spend less money than it is to make more, our children will be free to pick an occupation based on what they find most fulfilling, rather than the one that just fills up their bank accounts fastest. Minimizing their expenditures also gives them more flexibility to change careers, move to a more desirable location, go back to school, or stay home to care for a child (our grandchildren!).

Most importantly, spending less money allows them to save more of what they earn—so that they’ll be able to reach their own financial independence much more quickly.

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Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley:

Four Reasons You Shouldn’t Be Saving for College Just Yet

Yes, You Can Skip a Faraway Wedding

This is What Sting Should Have Done for His Kids

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