(click to enlarge)

This is funny (to me at least) in large part because it’s true. As a father of four, I can say with certainty that kids are expensive. Yes, there are lots of things that you can do to cut costs — and we do many of them. But there’s no avoiding the fact that it costs more to support more people. And that extra money spent takes away from what you could otherwise be adding to an investment portfolio.

Of course, this isn’t to say that kids aren’t worth the cost. That’s obviously a very personal decision. In our case, we’ve certainly had no regrets. But that doesn’t change the fact that there are a number of financial tradeoffs involved.

It’s been suggested that the cost of raising a child from birth to age 17 is well over $200k. I’ve never sat down and tabulated the cost, but here are just a few things that come to mind.

• Lost earnings (stay-at-home-parent) and/or childcare
• Baby stuff, toys, etc.
• Higher grocery bills for feeding more mouths
• More clothing for more bodies
• Larger house to accommodate more people
• More home furnishings to fill that house
• More expensive house from living in a better school district
• Higher property taxes from living in a better school district
• Private school tuition if you live in a bad school district
• Larger car (depending on how many kids you have)
• Gas money for all the extra errands, practices, etc.
• Piano lessons, taekwando, sports registrations, etc.
• Increased health insurance costs (premiums, copays, etc.)
• Increased life insurance costs (a bigger policy to support more people)
• Increased car insurance costs if/when you have a teenage driver
• Increased travel costs (e.g., airfare x family size)
• College education (if you choose to help them out)

And the list goes on…

Of course, you have to trade some of these things out against the costs you might incur in the absence of a family obligation. For example, due to the higher cost of traveling, you might opt for a relatively cheap summer camping trip or a trip to the beach rather than the trip to Europe that the couple next door just took.

And there are, of course, economies of scale… While some of these expenses increase linearly, others do not. The second (and third and fourth) kids don’t double (or triple or quadruple) your costs.

But the larger point still stands. Kids are costly, and you have to be comfortable with that (or at least aware of it) when deciding to start a family.

*Note: I actually discovered this article when reading JD’s article about the XKCD comic strip on compounding interest vs. earning more money. While some of JD’s numbers are suspect, he (and the comic strip) make an excellent point. While smart investing is great, you can’t ignore the power of increasing your earnings.

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Our thirteen year old recently asked me for some good books about investing. His savings account has recently reached a point where it makes sense for him to start learning about investing, and he’s obviously interested in doing so.

I started by giving him a copy of Stanley and Danko’s The Millionaire Next Door, which is an interesting and enjoyable read that emphasizes the importance of education, hard work, discipline, and frugality in financial success. He started the book last week and really seems to be enjoying it.

Over the weekend, I ran across a copy of Eric Tyson’s Investing for Dummies at the library, and it looks quite good. I’m not normally a fan of the “Dummies” series, but this book appears to provide a nice nuts and bolts overview of how different types of investments work, etc.

While I’m not looking to overwhelm him with reading, I’m curious if any of you have other recommendations of good financial books for a fairly mature, albeit still young teenager. Please leave your recommendations in the comments section for all to see.

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My earliest memory of personal finance (though I didn’t know the term at the time) was when I was in middle school. My mother had always told me the importance of saving, but one afternoon, she pulled me aside and took out a few sheets of paper – the amortization schedule for the 30-year mortgage on our first home.

She then showed me how much interest we could save over the life of our loan if we accelerated payments on the principal during the early years of the loan. Although my mom first framed the session as an applied math lesson (percentages! subtraction!), that would be my most memorable lesson in financial decision-making.

Many experts say that leading by example is the way to show your kid show to be financially responsible adults. Show, don’t tell, they say. I agree that action is important, but my experience with my parents lets me know that parents should show AND tell. Kids learn from your actions, but they also benefit tremendously from words that explain the reason behind the actions.

Growing up, frugality was the normal state of things for me. My mother was aggressively paying off our mortgage. Every month whenever there was something extra, she put it into the house. As I grew up – and as I ventured into the homes of friends or classmates and become more exposed to malls and advertising – I come to realize that my parents led a very frugal lifestyle.

They bought reliable cars new, but then drove them for over a decade; they almost never went out to eat; and they refrained from buying a DVD player until a few years ago, when it was utterly clear that VCRs were truly machines of the past. Married for almost 30 years, my parents have rarely been on a vacation by themselves.

So I grew up in an environment where saving money is normal. Had my mother not told me later the reasons behind her aggressive payment of the mortgage (financial freedom, she would explain to me patiently), however, that lesson may not have stuck with me for all these years.

Even when I was a little kid, looking at the papers and the rows of figures under the Interest Saved, Years Remaining, Principal Paid columns, I knew I was looking at something powerful. Those numbers were the reason we sat in faded fabric couches when my parents might have upgraded to leather, and had the thermostat set 66 degrees instead of 72 in the winter.

Because of the choices my parents made, they were able to ultimately pay off their mortgage a decade early, invest in other real estate ventures, and pay for my college education. I didn’t quite realize it then, but I realize it now – that amortization schedule was much more than an applied math lesson.

It was a show and tell of a careful weighing and calibration of dreams – of choosing to forgo something (nicer cars, bigger TV, more stylish clothing) in exchange for gaining something else that my parents deemed more important – the ability to pay off our home years ahead of schedule, thus freeing up cash flow for other goals. To this day, I think that amortization schedule explained to me the essence of personal finance more than any expert every could.

Note: Also check out GetRichSlowly’s post on how to raise money-smart kids. JD Roth polled readers who provided tips on how their parents helped prepare them for financial independence.

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Pausch delivered this talk just over three months after being told that he had “three to six months of good health left.” As such, he’s a self-proclaimed authority on talking about “what to do with limited time.” Certain parts of his talk really resonated with me.

The time/money relationship

Pausch’s talk spanned more than an hour, and covered topics including how to set goals, how to avoid wasting time, how to deal with a boss, and how to delegate to people. But a recurring theme was the relationship between time and money.

He argued early on that, while Americans are accustomed to dealing with money as a commodity, we’re not good at dealing with time as a commodity. As such, we do a very poor job of equating time with money, and are far too willing to waste the former while keeping track of the latter.

Turning money into time

Near the end of his talk, Pausch revisited the time/money point when he argued that people should go out of their way to turn money into time. That’s right… Rather than using your time to earn more money, you should use your money to free up your time. He went on to argue that this is especially important for people with children and/or other family commitments.

This really hit home for me, as we’re constantly short on time. Between working a full-time job, managing our business endeavors, and raising four kids, we’re swamped. While we’re now in a position where we can afford to “outsource” some of our less desirable tasks in the name of creating more time for ourselves, it hasn’t always been this way. On top of that, my wife and I are both do-it-yourselfers by nature, which makes it very hard for us to let go.

But guess what? Our kids are getting older every day. I know that this sounds a bit melodramatic, but… Bit by bit, our time with them is slipping away. It’s not really something that we notice on a daily basis, but it only takes a quick glance through a photo album to see how fast they’re growing up.

Putting words into action

If we want more time with them while they’re young, then we need to change our mindset. I’ve argued in the past that it’s okay to spend money — and not just on needs, but on things that you want, as well. That’s the whole point of having your finances in order, isn’t it?

Well, I want a less hectic life. I want more time with my family. I want a better balance. And I’m willing to pay someone to help out with some of the more mundane tasks around here in order to achieve these things.

If you’re curious about Pausch’s talk, you can view it below. Note that you can safely skip to the seven and a half minute mark if you’re not interested in the introductory remarks. Also note that Pausch authored a book called “Time Management” that was published posthumously.

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On the one hand…

Proponents argue that paying a child for grades, good behavior, or other accomplishments is no different than adults being paid to perform their daily jobs. Thus, paying kids for performance prepares them for the “real world” where you have to work for your rewards.

On the other hand…

Detractors argue that kids shouldn’t be paid to what they should be doing anyway. Thus, while kids should be encouraged to do their best, they shouldn’t be taught to expect a reward for simply doing what’s expected of them.

What’s our view?

My wife and I believe that kids (or at least our kids — we have four) shouldn’t be paid for things that they ought to be doing anyway. Thus, while we provide our kids with an allowance, we don’t tie it to academic performance, behavior, or chores around the house. We view the allowance as teaching tool that gives them an opportunity to learn about (and make mistakes with) money while the stakes are still low. But…

We don’t incentivize performance. Instead, we’d like for them to learn to be self-motivated, and to view success as a reward in itself. We want them to do the right thing because it’s the right thing, not because they’re getting paid.

All of this being said, we do give our kids a little something extra when they go above and beyond the call of duty. For example, when our eleven year old spent an afternoon crawling around under the house helping me make repairs, he earned some extra money. The distinction here is that certain things need to get done on a daily basis simply because you’re a part of the family, whereas other things are truly “work” for which you might otherwise expect to get paid.

What’s your view?

I’m guessing that this topic will stir up a diversity of opinions, and I doubt that we’ll arrive at one “right” answer. That being said, I’d like to hear your thoughts on the subject. Please leave a comment and share your thoughts.

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Ten years is a long time, and sometimes it’s hard to believe just how far we’ve come.

Looking back…

It was the spring of 1998, and I was still in graduate school. We had just one child, and he was only 7.5 months old. After his birth in the fall of 1997, my wife scaled back to working half-time and we were splitting shifts to keep our son out of daycare.

She worked in the mornings while I stayed home and then she came home while I did the grad school thing from late morning until… Well, whenever I managed to finish up and get back home. Life was busy, but life was good.

From a financial perspective, we were getting by, but just barely. About a year earlier, when we decided to start a family, I started getting my head straight financially. I started reading more broadly, including plowing through Time is Money which, as I’ve mentioned before, is probably the most formative financial book that I’ve ever read.

Around that same time, I also started tracking everything in quicken (I now have eleven years worth of data!) and taking an active interest in managing what little money we had. Despite our limited means, we always managed to steer clear of debt — this was a huge accomplishment that set us up financial success down the road.

I was also starting to dabble in investing via dividend reinvestment plans (DRIPs), but we were still years away from opening our first online savings account, and the concept of buying index funds or investing through a discount broker was still far off in the distance — we didn’t have enough money to meet the fund minimums or to keep the brokerage costs down.

In the time since then, I changed jobs a couple of times, we bought (and sold) our first house, bought another house, and had three more kids (not necessarily in that order). Our income and net worth have grown steadily, we’ve built a solid investment portfolio, and we’re still debt-free (except for a 15 year mortgage).

So… What did we learn from all of this?

• The importance of living below your means – we’d never be where we are if we had loaded up on debt
• Patience – it sounds cheesy, but good thing come to those who wait
• The value of paying our dues

What about you?

What were you doing ten years ago? And how far have you come?

Be sure to check out these other great contributions:

» My Finances 10 Years Ago and Now (Free Money Finance)
» Looking Back: 10 Years Ago (No Credit Needed)
» My Finances Ten Years Back (Mighty Bargain Hunter)
» How My Current Financial Situation Compares with a Decade Ago (Get Rich Slowly)
» Looking Back: The Difference 9 Years Makes (Consumerism Commentary)
» Then and Now: What Our Finances Looked Like Ten Years Ago (All Financial Matters)
» Money Management Lessons: Not Quite 10 Years to Life (Wise Bread)

This article is part of the MBN Group Writing Project on financial retrospectives.

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For background, our original allowance system involved paying the kids $0.50/week for each year of age, broken down as follows:

30% spending money
30% short term savings (e.g., a video game, pricey toy, etc.)
30% long term savings (e.g., a car, college, retirement, or some such)
10% to the charity of their choice

So, for example, our ten year old would get $5/week with $1.50 into spending, $1.50 into short term savings, $1.50 into long term savings, and $0.50 to charity. After giving this system a bit of time to work, we decided to tweak our allowance system a bit to provide more flexibility (or more lessons about money management). Here’s what we did…

60% spending money
30% long term savings (e.g., a car, college, retirement, or some such)
10% to the charity of their choice

The reason for lumping short term savings in with spending money was to let the kids decide whether (and how much) to save for bigger ticket items, as opposed to frittering their money away on smaller, more immediate purchases. All in all, this has worked quite well.

Of course, we also give the kids an opportunity to ‘upgrade’ spending money to their savings. We call this our 401(kid) plan, and for every dollar they decide to move from spending to savings, we match it with a dollar of our own. Their savings accounts are held as joint accounts at ING Direct, such that we can access everything under a common login.

This system works quite well, with one exception… We’ve found that it’s often difficult to keep up with a weekly allowance payment, such that we wound up giving multiple weeks at a time less frequently. While the same amount of money was getting doled out, it was far less consistent than we had intended, and it often left the kids unsure of how much that had.

To rectify this problem, we’ve tweaked things a bit more. This time, we left the 60/30/10 distribution unchanged, but have opted to move to monthly payments. So now we sit down on the first weekend of every month and settle up. The biggest change here aside from the frequency is how we figure the amount.

Instead of paying $0.50/week per year of age, we now pay $3/month per year of age. This works out to a decent raise for the boys, though it’s still far from extravagant. And the decreased frequency of their allowance payments means that they have to budget a bit more to get through the month.

The other recent change is that our youngest is now three year olds, which is the age at which we start paying an allowance. For him, this means getting $9/month.

For more thoughts about kids and money, see these articles:
» Kids and Money: Long Term Savings
» Teaching Kids About Money
» Teaching a Six Year Old to Save
» Teaching Kids the Value of a Dollar
» Allowance Insights
» Teaching Kids About Money: Lead by Example

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The online option

Since I had signed us up for Amazon Prime last fall, I figured we could just order it online and he’d have it in his hot little hands in a few days. After all, they had a great price, free shipping, and no sales tax. But that’s not how a kid views the world.

That wasn’t fast enough. He immediately began lobbying for a trip to the store. Since we had to stop by Wal-Mart to pick up some things for his brother’s birthday, I relented. “We can check it out and see if they have a decent price,” I said, knowing full well what would happen if they had it in stock.

Meanwhile, at Wal-Mart

When we arrived in the electronics section I discovered that the game of his dreams was selling for a dollar more, plus he’d have to pay sales tax. All in all, it would cost an extra $3.33 — roughly 10% more than if he purchased it from Amazon. I tried to explain this to him.

I tried to tell him that the price difference was nearly two weeks worth of spending money. I tried to assure him that it was better to wait two days and save the money, especially since he’d be in school for most of that time. But it was all for naught. He was determined to buy it.

Since the whole point of paying our kids an allowance is to teach them learn to handle money on their own, I relented. He bought the game and has been having a blast with it ever since. Was it worth paying 10% extra to get it two days sooner? In my book, no. After all, good things (like substantial savings) come to those who wait. But if you asked him, I’m sure he’d say yes.

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10 years
9 surgeries (4 C-sections, 2 carpal tunnel, 2 sets of wisdom teeth, and a tonsillectomy)
8 trips to Disney World
7 car trips of more than 2000 miles
6 ear tubes (two of our kids, three sets total)
5 moves (fortunately three of these were local)
4 kids
3 states of residence (one of them twice!)
2 homes bought
1 home sold

And a partridge in a pear tree… We’ve had a very busy (and very, very good) ten years!

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Out of curiosity, I asked our kids what sort of gift card they’d like to have if they were to (hypothetically) receive one as a Christmas gift. I was expecting answers along the lines of Toys’R'Us, Target or Wal-Mart. I was therefore pretty surprised when our five year old answered “Kroger” (in case you don’t know, that’s a grocery store).

When I asked him why he wanted a gift card to Kroger, he answered “Because they have all kinds of food.” Wow. That’s a pretty practical, down-to-earth answer for a kindergartner. In case you’re curious, he ended up with a Toys’R'Us gift card. Thus, he was able to buy that Might Morphin’ Power Ranger that he’s been dreaming about rather than having to spend his Christmas gift on groceries.

On a related note, when I asked our eight year old what he wanted to get his mom for Christmas, he thought about it and then replied: “Well, she likes to shop. How about a gift card to Toys’R'Us so she can by diapers for the baby?” Needless to say, mom didn’t get a Toys’R'Us gift card. But apparently practicality runs in the family.

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Rather than breaking out the PB&J every single morning, I’ve gotten into the habit of spending a bit of time on Saturday or Sunday afternoon making (and freezing) all of the sandwiches for the upcoming week. As it turns out, PB&J sandwiches freeze (and thaw) really well, and making a pile all at once is far more efficient than doing it piecemeal. As of this year, I’m making a grand total of seventeen sandwiches at a time (five each for myself and two full-time school kids, plus a twice-a-week preschooler). This works out especially well for us, as I like PB&J as much as the kids do, and the resulting modularity of the morning lunch-packing routine (i.e., grab a sandwich from the freezer, throw in a yogurt and some fruit and I’m done) makes it all the more likely that I’ll actually bring a lunch to work. And to think that sandwich-making is enough of a burden on society to support the creation of a entire frozen PB&J sandwich industry! Then again, they do come with their crusts already cut off.

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In short, I’ve found that our original system imposed a bit too much order, and didn’t give our kids enough latitude to make (and learn from) mistakes. The main culprit here was the distinction between short term savings and spending money. We’ve now simplified the system by putting 60% of their allowance into the spending category and abolishing the short-term savings category entirely. It’s now up to the kids to decide whether (and how much) of this money to save for bigger ticket items, as opposed to frittering it away on smaller, more immediate purchases.

As it turns out, we’ve got a couple of savers on our hands — our seven year old has already saved enough to purchase a portable CD player (complete with MP3 capability) and our five year old is rapidly closing in on a Star Wars GameBoy game. Our three year old is too young to really ‘get it’ yet, and he doesn’t officially take part in the allowance ritual (nor does our baby). I do, however, give him a quarter on allowance day (which he promptly deposits in his piggy bank), and he’ll ultimately join the fun when he turns five.

To make a long story short, I’d have to say that the increased freedom to spend vs. save has been a change for the better, and it has led to some good dilemmas of the “if I buy item X right now, how much longer will I have to wait before I can afford item Y?” sort.

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Our current wills are pretty standard stuff… If I die, everything goes to my wife with our kids as secondary beneficiaries. If my wife dies, everything goes to me with the kids as secondary beneficiaries. We’ve named a guardian for the kids but, beyond that, we haven’t done any additional estate planning. I’m not really sure what more we need at this point but, given our dramatic increase in responsibility, it seems to me like it’s time to think about enlisting professional help — if for no other reason than the peace of mind that comes from knowing that all of our ‘i’s are dotted and our ‘t’s are crossed (legally speaking). It’s going to take us a bit to get going on this, but I plan on chronicling the process here once we get the ball rolling.

Got an opinion as to things we should be considering? Thoughts? Advice?

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We’ve decided that, once our kids hit five, they’ll receive $0.50 per year of age per week, broken down as follows:

30% spending money
30% short term savings (e.g., a video game, pricey toy, etc.)
30% long term savings (e.g., a car, college, retirement, or some such)
10% to the charity of their choice

So our seven year old pulls down $3.50/week, with $0.35 going to charity and $1.05 going to each of the other categories. Of course, he’s free to ‘upgrade’ money from spending to short term savings, short term to long term, or any of the above to charity. We’ve set up containers for each category, and will periodically sweep their long term savings into an online bank account such that they can login every once in awhile and look at their money. As their savings continue to grow, we’ll be investing it on their behalf. We’re leaving the destination of the charitable contribution up to the kids. Our seven year is currently thinking of the Salvation Army, whereas our five year old wants to donate to the Red Cross since they helped so much with the tsunami. Once they’ve save up a few bucks, we’ll send it off.

It already looks like this will be a great learning experience for the kids. Our seven year old has gotten interested in how banks work, why/how they pay interest, etc. and our five year old is getting some good math practice as he figures out how to make change on payday. And both are starting to learn how to set financial goals and how to save/budget to meet them. In fact, our seven year old has his sights set on a portable CD player, and I’m sure that he won’t spend a cent until he has it — he’s a born saver. Our five year doesn’t have a clue what he’s saving for, although the release of the Star Wars III has him thinking about some new Star Wars toys.

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» One Year Ago This Week (August 6th – August 12th)

Case in point… For the 2004 tax year, we had total taxable income of ~$71,500 (line 22 on form 1040; this is after pretax deductions for things like retirement accounts and health insurance). But when all was said and done, we had a total federal tax liability of just over $1000 (line 62 of form 1040). According to TurboTax, our effective federal tax rate was just 1.28%. That’s pretty unbelievable if you ask me. I actually felt a bit guilty about paying so little, and I ended up going back through our return to double- and triple-check the figures to make sure they were right. Sure enough, they were.

Not surprisingly, our low tax liability was largely due to the fact that we have four kids, although we did have a good number of other deductions (mortgage, the state sales tax tabled value + sales tax on a new car purchase, charitable donations, etc.). But ignoring those other factors for the moment, it really is hard to beat the extra exemptions plus the $4,000 in tax credits from the kids. Yep, that’s $4k in credits substracted straight off our tax liability. To be completely honest, I’m not a big fan of child tax credits… I’ve always had a problem with what amounts to paying people an annual stipend for having kids. But as long as it’s on the books, we’ll be taking advantage of it.

And for the record, my initial statements were tongue in cheek… Having kids in order to save on taxes is not only twisted, it’s also the definition of penny wise and pound foolish. Whatever you save on taxes will pale in comparison to multitude of child-rearing expenses that you’ll incur.

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I soon noticed that he was actually getting pretty good. But instead of trying to right himself whenever he started to tip, he’d always take the easy way out and simply put a foot down on the ground. It was clear to me that he just needed a little nudge to get over his trepidation. So I made him an offer that he couldn’t refuse.

I offered him a dollar if he could coast to the end of the cul de sac without touching the ground. And after just one try, I owed him a dollar. Next up was learning to pedal.

I briefly explained to him what to expect when pedaling without me holding on. I then offered him another dollar if he could pedal to the end of the street. After a few false starts, he rode off and earned his dollar. But whenever he got to the end of the street, he would walk his bike back up the incline so he could start again, so…

I made him a final offer: ride back up the hill for a third (and final) dollar. After a couple of tries, he got the hang of starting of uphill, and he rode right back up to our house. Since that time, we’ve hardly been able to get him off his bike.

So… The next time you need to teach a kid to ride a bike, think about paying them off. Unorthodox? Maybe. Effective? Definitely. Three bucks beats the hell out of running up and down the street endlessly, and it was a lot more empowering for my son to essentially master this on his own.

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He did, however, point out that not everything comes from China: “One time I saw something that was made in the USA, though.” Turns out it was a manhole cover from near his bustop. What really struck me about this was that seeing something that had been ‘Made in the USA’ has become so rare that something as mundane as a manhole cover is now worth taking note of.

It wasn’t that long ago that Wal-Mart was trumpeting the fact that so much of what they sold was Made in America. It’s amazing how quickly things change, and even more amazing how much of an impression stuff like this can make on a first grader.

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You see, I’m essentially the Chief Financial Officer of my family and, although our finances aren’t horribly complex, our money is spread around a bit in multiple retirement accounts, a couple of online bank accounts, a ‘regular’ brick and mortar bank, etc. When you start thinking about all of the account numbers, passwords, and other related minutiae, the information really begins to pile up. Add to that the various legal documents – such as our badly outdated will, the deed to our house, our car titles, life insurance policies, and a variety of other documents that we don’t regularly use, and which I don’t relish having to replace if lost, stolen or destroyed – and even our relatively simple life begins to look increasingly complex. Especially if someone is trying to make sense out of it in the wake of a family tragedy. And the situation would, of course, be compounded if my wife and I both perished, and left the proverbial keys to the castle (along with our kids) to their guardian.

So… I wanted to create a centralized user-manual for my family’s finances but, since such a compendium would be full of very sensitive data, I wanted to store it in a secure location outside of our house. Sure, we have the requisite fire-proof lockbox, but I wanted an über-safe solution. So I stopped by our local bank branch and rented a 3″ high x 10″ wide x 24″ deep safe deposit box. It costs just over $30/year, and it should suit our needs perfectly. It’s plenty large to hold all of the necessary paperwork without having to fold it up and cram it in, as is necessary with some of the smaller boxes, and we’ll have a bit of room to spare for miscellaneous other things, like a video inventory of our house. Now all I have to do is find the time and inspiration to collect and collate all of the necessary information.

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