This is for my son…The Money Talk

My son is getting ready to go off to college this fall. He’s working this summer to earn his room/board, books, and miscellaneous stuff he’ll have to buy. So now that he finally has a little bit of an income and some money, we sat down the other night and talked about how to manage things. I thought I would post this so he can refer to it any time and be reminded how it works. This is my philosophy.

The first rule is to live within your means. For my son, this means figuring out what his costs are and then making sure he takes care of those first and whatever is left over he can decide how to spend it. We figured out that he will need about $4,000 for his portion of school. So his “means” are anything over that amount. He’s working, so what he ends up with is still to be determined.

Then we setup four buckets for his money. I used the term “buckets of money” and he thought that sounded good and he wants buckets of money. Me too!

  1. Checking account. This is his money to spend. He will also include in this account his “Emergency Fund”. For him, $500 is probably fine. So if he has $575 in his account halfway through the year, then he only has $75 left to spend in order to keep his emergency fund available. We talked about what an emergency is and isn’t. For me personally, I treat everything as not an emergency. Fixing the car is not an emergency. Paying for college, not an emergency. If my son or wife is being held for ransom, that would be an emergency. So I actually funnel every expense into a normal monthly cycle, which forces me to allocate and cut back on some things to pay for others. If we are constantly having emergencies then it’s tough to get ahead.
  2. Savings account. This is his school money. I believe savings should be for a defined purpose. Too often we say “save your money” but without a goal, it doesn’t work. He needs $4,000 in his savings account by August 27 to pay for his portion of school. This may be flexible too because if he rents his books, or buys an older used version on Amazon, or borrows, or something, then his actual costs will be less and he’ll end up with a surplus for the year that he can roll over to the next year. When it’s time for him to make a payment, he transfers what is needed to his checking and writes the check. His savings account shouldn’t be touched for anything besides his school.
  3. Investment accounts. This is a long term investment, and not to be touched. This money is to build for the future. We don’t really have a definition of what this money will be used for, but its to build assets. He has a mutual fund and a couple of stocks. Any money he puts into his investment portfolio is to be left alone for several years. He’ll make contributions to his investments as he has the means to. He’s got to take care of his college costs first. But then if he earns an extra $2,000, he can choose to put $1,000 into his investments and keep $1,000 to spend on stuff. If he regularly contributes to his investment accounts, he’ll build them up and he’ll become more sophisticated as he learns more. I invest in real estate. He can do that when he has some more money, but stocks and mutual funds are a great place to start.
  4. Retirement. Yes, a retirement account for an 18 year old. Since he is so young, he’ll start a ROTH IRA. He’ll put 10% into it every year. A ROTH makes the most sense for him, but the point is to start thinking really long term. I wish I had started an IRA or retirement plan at 18. I might be retired now.

I believe if he takes care of those four things, he’ll be fine. Save for school, invest for the future, and don’t forget retirement. I also believe he should contribute in an order of 4, 2, 3, 1. Retirement should come off the top, otherwise it’s hard to do it. Since school is his main goal right now, the next thing he does should be to get that account fully funded. Then he can split the surplus between additional investments and normal expenses.

This is a little basic, but that’s ok. Money management doesn’t have to be complex. And the simpler the easier to follow. To me, it’s all about discipline. Figure out what you need to do and then do it. Be aware of what you are doing. Watch your money.