Today we are talking about all of the accounts we can open for our (well-behaved and absolutely deserving??) children! This is a follow-up from my post a few days ago on investing for our children.

So which account is the best to open and start?

First, we have two approaches. We can either invest for them in our own investing accounts and gift them money later (following gift-tax limits), or we can open accounts on their behalf in their name that will belong to them or fund their education.

The three accounts we can open FOR them are:

?1. Roth IRA account for any income earned by them (income should be verifiable on tax forms; things such as sibling babysitting, cleaning up toys etc. doesn't qualify).

?2. The 529 account for their college savings. If your state of residence offers a tax-deduction, it's the best option, if your state doesn't, you can open an account with any state, and most recommended are Utah, Nevada or also through Wealthfront. The 529 plan is also quite flexible and can be transferred for a neice/nephew's tuition etc, so there are alot of options.

?3. A taxable brokerage via UTMA. The UTMA act (under the UGMA) was passed to allow parents/grandparents to open an account on a child's behalf. The helpful thing here is that this account will be taxed at child's tax rate (kiddie tax) removing it from parents taxable assets (esp. helpful for wealthy folks) [Note current laws for this account: First $1050 in earnings is tax-free, the next $1050 is taxable at child's tax rate and any earnings over $2100 are taxed at parents' rate] ; also this account will affect financial aid for college. Personally ?, I'm still hesitant about this account because it fully becomes under child's control at 18 or 21. If it's a small amount, it's not a big deal but if it's a lot, I'm not sure how comfortable I feel for my kids to have access to a good sum of money at such a young age. I don't want it to be a "motivation-reducer" only to save on taxes.

Hope this is helpful! I definitely went down the ??️ of information to make these slides!

?I have seen this graph in the Bogleheads, AllianceBernstein and a few other websites floating around and wanted to share this powerful graph. By just removing 1% of AUM (assets under management) fees from paying a financial advisor or insurance agent, we can increase our networth by 220K and add 10 years of spending money! How insane is that?

?‍⚖️This is why I harp so much on why we should learn to invest ourselves instead of paying someone else to do it for us. The question we have to ask ourselves is, is me learning to invest worth at least 220K and ten years of financial freedom? I think the answer is yes!

?Here is the research from AllianceBerstein:

"Results are simulated. The saving phase simulates a participant with a salary of $45,000 at age 25, linearly increasing to $85,000 by age 65, making yearly contributions of 6% of salary at age 25, increasing by 0.5% per year to a maximum of 10% and with a 50% company matching contribution up to the first 6% of salary. In retirement, $63,750 (75% of final salary) is deducted at the beginning of each year. The blue-shaded area shows ending savings with an investment return of 9% assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant thereafter. Inflation is assumed to be a constant 3%. The tan-shaded area assumes 1% greater return each year. All amounts are in present-day dollars."

?So don't wait to start investing - my recommendation is always low-cost and broad-based index funds through Vanguard!

?️As usual, I'm not a financial advisor and this isn't investing advice; this is educational information for all of us to learn together.

??‍?So please take out some time this weekend, and get started on managing your personal finance or check your portfolio if anything needs to be updated! Have a great weekend everyone!

☕So how does this Roth IRA thing work and can we all become billionaires? (Short answer: no ??, but read on...)

?Propublica (an investigative journal) revealed how Peter Thiel used a Roth IRA to grow $1,700 into $5B. The Roth IRA was started by Senator Roth Jr. to help hard-working, middle class Americans save for retirement. As we know, this account is amazing because we contribute post-tax money, and the money is tax-free on growth and withdrawal, and hence, there are income and contribution limits. However, there have been a few loopholes. One being the "backdoor" Roth for high-income earners (which I discussed before, scroll down) and another is the "self-directed" Roth IRA which has the same tax benefits of a standard Roth but it also allows us to invest in other asset classes such as real estate, startups etc.

?So the plus is that we all have access to this powerful account and we should all invest earned income into it (limit is 6K per year). However, can we all become billionaires using it? No. The reason is that we would have to be able to identify the next unicorn startup that will successfully IPO. Most of us can't, and infact many people do this as a living called venture capitalists and angel investors. However, I talk about this often, 90% of startups fail and most VC firms (with people working FT on deals and with access to all of the insider info) don't make money. So it's really hard for us average investors to figure out who the next winners will be.

?But why is this so upsetting if Thiel was able to identify (or got lucky) a big winner when we can't? Well, we don't particularly mind that he's earning billions because we live in a capitalist society, but what we DO mind is that the ultra-rich continue using loopholes aimed for the middle-class to avoid paying taxes! Things like this do need to change because it's really unfair and demoralizing.

?The way I see it, most of us are not trying to become billionaires or buy a yacht to sail the seven seas, but we do want to be financially independent, so in the meantime we should continue investing in our retirement accounts and work proactively towards our financial freedom!

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?Saving and investing is great and all, but what about when we have kids?! Everyone says they are a money pit so how do we approach that while trying to invest and grow wealth?

?First things first, with my medical background I have to point out, I made sure to look at a few journals to make sure that 85% of the brain is infact formed by age 3. According to the Journal of Comparative Neurology from research by Dr. Huttenlocher, if you look at figure 2 (I'll link it in the comments), you can see that about 85% of the prefrontal cortex is formed by 1000 days which is about 3 years of age. Essentially, the brain develops the most during the early years, and so it's important we pay attention to this.

?Hence, investing in the stock market is great but investing in our kids is more important, especially during the early years. Passing on generational wealth to them isn't going to be that helpful if they are not able to live up to their fullest potential.

So these are the things I have found to be helpful:

?1. Quality Toys: Don't go overboard, but spend money on toys and activities that are great for development. The best toy in my opinion is @magnatiles (can they sponsor me please lol) but there are many great options like train sets, walker, @melissaanddougtoys. I personally don't think wooden blocks should be the only toys kids should play with even though that seems to be a common trend now. I think a limited, quality mix of wooden and colorful toys is a great approach, and I would invest in these toys without hesitancy.

??2. Quality Childcare: Pay for quality childcare. Treat caregivers well and they will go above and beyond for your kids in return. Expense wise, this one is hard because it is a HUGE expense; it is actually my biggest expense (more than our rent per month). And there are many, many options for childcare (Au pair, preschools, nannies etc). Preschools in the Bay Area are like around 2-3k/month per child, but there are also home-based options for around $900/mo - but you should go with the one that is providing the best quality care even if it is more expensive, it is definitely worth the investment.  Also, going too elite doesn't always work out either, I first enrolled Adam at a top school and it just wasn't a good fit. We ended up sending him to one that was a middle ground, play-based school and he loved it there. There is no right or wrong here, go with your gut instinct and pay for the quality care even though it hurts the bank account a bit.

?3. Quality Time: There is a money value to your time and - whether it's a working parent or stay-at-home parent, there is no such thing as "free" care because a parent's time is always valabue. But it's worth that money to spend it on our children. We can have all the care in the world, but kids still want their parents. So IF and whenever it is possible, choose time with your kids over earning more money especially when they are young (I know it's not possible for everyone, especially due to financial reasons, or deep in medical training, but whenever possible). Don't feel guilty for spending time with them, because this is an investment, just like putting money in the stock market is. And if you can't spend as much time right at this moment, that's ok too, as long as they have (no. 2) above, they will do great.

??4. Investment Accounts:Invest for them for the long-term. Technically this isn't superseding saving money because it's saving and investing, but investing in these accounts for our children is the best way to help attend college, buy supplies for school and give them a safety net to take risks with their talents and careers and to pursue what they love.

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How powerful is compound interest and investing? Very powerful!⚡

?One of my popular posts was one where many people were shocked to learn that by just saving $27.40 a day, they can save $10,000 a year! But what's even more shocking is that if you invest that $10K for the long-term in index funds, it will net you millions.

?I kept this calculation conservative at 6% and in tax-advantage accounts such as 401K, Roth IRA and HSA accounts. However, if you did the math with a growth of 8% (which is what the market has historically shown to perform since 1957 with the start of the full 500 companies in the S&P500), your net worth would be 2.5M in tax-advantaged accounts and 1.4M in taxable accounts.

?‍♀️So start with saving $27.40 a day, and start today!

?Like with anything worth having such as a good relationship or a home, building a strong foundation is very important. This also applies to personal finance, and these are the building blocks to financial independence. These building block "rooms" make up a strong and resilient "home," such that you can comfortably live life on your own terms.

?Here is a comprehensive list of the building blocks:

?Money Mindset & Organization Room: Having the right money mindset and being organized with the process

?Budgeting Room: Understanding all of the money coming in and going out; automating the process

?Emergency Fund Room: 3-6 months of safety net when emergencies arise (outside of things not covered by insurance)

?High-Interest Debt Pay-Off/Refinance Room: Eliminating all credit card and high interest debt; refinancing loans or mortgage to the best interest rate

?Insurances Room (Term-life, disability, home/car, umbrella insurances): your "defense" in protecting your wealth from any major catastrophic event

?401K/403B Room: Tax-advantaged retirement accounts

?HSA Room: Tax-advantaged health and retirement account

?RothIRA/Backdoor RothIRA Room: Tax-advantaged retirement account

?Vanguard/Wealthfront Room: Taxable accounts to continue growing your wealth

?Estate Planning Room: Protecting your assets for your spouse, kids, and family from the probate process, with a focus on proper generational wealth transfer

?529 Room: Tax-advantaged college savings plan

?Cash-Flow+ Real Estate Room/Startup or Angel Investing: This is an option once everything else is taken care of, as a means to even shorten the time to reach FI, but proper steps must be put in place to achieve this well with a lot of time and research

⌚??‍♂️These steps take a lot of time and effort, with each step having more sub-steps.  And everyone will have a different starting, middle and ending point, but that is the beauty of it - that no two experiences are the same in personal finance. That is why it's called "personal" finance.

?A lot of us while growing up were told, saving money is king?. Yes, saving is important, but it must also go hand-in-hand with investing. There is something called inflation which means that there is a decrease in value of money as time progresses or as we all have experienced while shopping, a rise in price level over time. So $10K today will be worth a lot less 20 years from now. In order to fight against inflation, we have to invest our money so that it grows with the stock market. Historically, the market has always given 6-10% returns. So investing in the market is your best bet against inflation. So you have to make sure that your money is working for you in the market and not sitting around being a lazy bum in a checking or savings account and losing its value every year.

?Keep in mind, 3-6 months of emergency funds should be kept in a high-yield savings account, and any money that you need within 5 years such as the down-payment to a home should be kept in a high-yield savings account, so you have access to that money any time even if the market is down. Everything else should be invested in the market using low-cost broad-based index funds such as Vanguard's VTSAX index. Start with tax-free accounts such as 401k and Roth IRA and then to general taxable accounts, so that your money works for you and grows with the market netting you 6-10% return every year.

?And true, few people can technically save their way to $1M (or if you have a big windfall from a company you founded or a wealthy great aunt that left you a trust), but for the rest of us, saving to 1M will be very hard as we continue to fight against inflation. For the average investor, it's best to invest in the market and ease the burden of growing our wealth by letting the market do some heavy lifting for us in growing our net worth.

?If two billion dollar companies' bitcoin investment makes up less than 10% of their portfolio, why should ours be more? Tesla's bitcoin purchase is around 7.7% and Square's is around 5% of their portfolios.

?I read up a decent amount on bitcoin, and read the summary of "Dollar Crisis" to understand how the dollar and bitcoin can be related. But the book has some faulty logic - afterall, the value of the dollar (currency of a country) is based on the assets of the country (the people, the infrastructure etc.) not just the gold the country holds, so I'm not seeing a clear correlation of something like bitcoin to replace the dollar or how it can work together. Cryptocurrency is still the wild, wild west and everyone is taking a bet. It's not backed up by the FDIC, there are no rules or regulations, laws or courts, or anything; but Coinbase is making a lot of profit with all of the transaction fees landing Brian Armstrong in the billionaire net worth list.

?There is also a lot of scam involved with, and as I mentioned, there is no regulation. In 2014, Tokyo-based Mt. Gox, a trading platform went bankrupt and left owners looking for hundreds of thousands of bitcoin. According to the NYT, some 20% of 18.5 million bitcoin users have lost their keys or password to around $140B in those coins. As of right now, crypto is still the riskiest thing you will buy.

??Now, I totally understand the hype and curiosity. I myself purchased very little BTC and ETH (<0.1 of my portfolio) to learn and understand how Coinbase and bitcoin works so that I can learn by doing, not just reading, and already sold my BTC back. Trading or timing the market actually stresses me out. I personally like the "set it and forget it" option to index funds bc I find excitement in spending time with my kids or going to a concert, not if my stocks are going up or down.

?Now, if you must buy bitcoin because it's something new and interesting and you are emotionally fine with taking bets AND you are on a clear path to financial independence, and have maxed out all tax-advantaged accounts (accounts that have been PROVEN to work), then an article I read on CNBC recommended buying 1% of your portfolio on bitcoin. Again, all of these bitcoin numbers are all random, so this is the best number I could find.
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And assume you already lost this money. And now if you make a lot of money off of it, then that's great, but remember, I like to talk about and emphasize things that work for the average investor, not on things because someone just got very lucky. It's hard to replicate luck, but easy to replicate historically proven stats that have worked for every average investor.

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?Here is the "cheat sheet" or "high-yield" points of personal finance! If you have all of this taken care of, you are 90% done and ahead of the game compared to most people.

?Understanding investing, and how compound interest and index funds work is very important. However, don't forget your "defense." A small accidental disability can prevent you from working and wipe out your investments if not insured properly.

?Say for example you are a surgeon and you get into a minor car crash. You are overall fine, just some pain, no big deal. But let's say that pain was a hurt right pinky (5th digit) and you can't use it anymore. Now, it's really hard to perform procedures with precision as a surgeon and you will need to either hope/pray with therapy that you can continue working but in many cases, you will need to find an alternate career because you can't perform surgical procedures anymore. This is why having proper "defense" set in place is so important. Statistically, more people get disabled than die (which is why disability insurance is so expensive compared to term life insurance) but it is very important in many careers. Defense finance is a way to protect your finances.

?Keep in mind I said term life insurance, not whole/variable life insurance which is never a good idea?

?The "offense" is also important, and something you have to proactively do. It's a way to GROW wealth, not a way to PROTECT your wealth. So as in football, both sides are very important to a successful game or a Super Bowl win??.

?Stick to what has worked for thousands of people in helping them retire comfortably - and that is growing wealth slowing with broad-based index funds, and protecting your assets while doing so.

What is the biggest fear with investing? OMG, I'm going to lose all of my money!!!

?That's what I always thought too - it's risky and it's for investment bankers and hedge fund managers. Soooo I'll be over here using my checking account and saving - KThanksBye! But you have to push yourself to dig a little deeper and see what I'm talking about. That there is a way to invest for the average person who can also CHOOSE the risk level depending on their age and grow their wealth. Just savings will not help you reach your retirement or financial independence goals because you need to EXPEDITE the savings using compound interest. Your savings cannot outdo the compounding effect of the market (well maybe if you are Jeff Bezos etc - but you better have intergenerational wealth, product market fit, exponential growth of your company??) BUT I'm talking about the regular folks, all of us that just want to have options and freedom to do what we love.

?And so if you really think about it, the stock market ups and downs shouldn't scare you. I realized it follows the trajectory of all major things including life itself and parenting. There are high highs and low lows. However, ultimately things go upwards, just like the market historically has. This is why we choose to live optimistically, be a parent even though it's insanely hard, and invest to grow wealth.

?‍⚕️?‍?‍?Physicians, nurses and healthcare workers are holding up the medical front of the pandemic, but moms are holding up society. Most moms were already overburdened from responsibilities before the pandemic, but the pandemic has pushed it into a crisis. We need to do more to support moms because they manage families and societies, educate the next generation and basically create world peace (hello Jacinda Arden!).

?I was inspired by @reshmasaujani NYT article on moms being the bedrock of society, as well as @amy_riveter point on having affordable childcare for moms, and illustrations from #momlife from the @mavenclinic and decided to make a similar illustration for moms with a financial spin.

?The number #1 request for many personal finance experts and influencers is how to invest money for kids, so I made this helpful post to make it easier for moms to understand the differences between these accounts quickly. Dads are welcome to learn too ?.

?Please keep in mind, you should only contribute to these accounts after you have a sound plan for retirement (401K, tax-advantaged accounts etc.) because you can't take out loans for retirement but kids can for college. Also having an estate plan in place to designate assets and protection for your kids is an important part of financial planning.

These are the 3 major plans:

?529: College savings plan, contribute up to 15k/yr to avoid gift tax (or front-load 150k one time), you contribute after tax-money, has tax-free growth and no tax on withdrawal; you own it (not the child); some states have tax-deductions so you want to open plan with that state (state 529 website), and if no deduction available, then Utah plan has show to be best (anyone from any state can open Utah plan)
?Coverdell ESA: similar tax benefits but limit is 2k/year; K-12 use; income limit exists
?Some states such as TX & FL have amazing lock-in plans for residents; you lock-in public college tuition rates which you pay now, but kids use years later for college at locked-in rate (no worry of inflation)

UTMA/UGMA: Custodial account to pay for anything; child owns the money but parent controls it until child is 18-21yo; contribute up to 15k/yr to avoid gift tax; account is taxed at child's tax rate; you can use Vanguard to open this account

Roth IRA: Account for income earned by kids starting any age, contribute up to 6K/yr; you contribute after-tax money, has tax-free growth and tax-free on withdrawal; amount put in can be withdrawn anytime but the earnings can only be withdrawn at age 59.5; you can use Vanguard to open an account

TL;DR: for college savings, the 529 plan is the best plan to invest and grow tax-free, letting compound interest do it's magic for college tuition!

Also remember, you can purchase my bestselling kids financial workbook HERE. Best for ages 3-7 years old with lots of fun and engaging financial worksheets.