PARENTS: Best way to store/save/invest money for children??

[LightHouse]

I figured this would be a great place to go for some suggestions on what to do with saving/storing/investing money for your children. Right now we have several people that are contributing to the child's "college" fund. Obviously cash is a terrible and un-safe way to store the money.

We have already discussed that this college fund with bee for either college OR starting a business if that's what he so chooses. We will give the option and see it through. That way he is not forced to go in any one direction, he will be educated and enabled to be able to get a head start on things.

In that we are trying to figure out the best place to put the money. Low yield investment funds? bonds? gold/commodities?

The option to use it now as Monopoly Money is off the table because we do not want to assert much risk on this money since most of it isn't even coming from us.


So fastlaner Parents, what is your advice, experience, data on these types of things??

 

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[OzGrinder]

Obviously cash is a terrible and un-safe way to store the money.

Interesting? Why do you feel that is the case? My parents used term deposits and it paid for most of my education. So it worked for them.

At the time I don't know if 'Education Savings Plans' existed. These are essentially low yield investment funds, with a number of options and relative returns based on your appetite for risk, ie. Capital Secure, Balanced, high growth etc.

Although I don't know how these differ from just regular managed funds, it might just be a marketing thing. Something that might be worth looking into nevertheless.

 

[LightHouse]

Interesting? Why do you feel that is the case? My parents used term deposits and it paid for most of my education. So it worked for them.

At the time I don't know if 'Education Savings Plans' existed. These are essentially low yield investment funds, with a number of options and relative returns based on your appetite for risk, ie. Capital Secure, Balanced, high growth etc.

Although I don't know how these differ from just regular managed funds, it might just be a marketing thing. Something that might be worth looking into nevertheless.

Inflation, It would need to be atleast something the keeps up with inflation over the years, as cash it will just devalue. Also I meant it literally too, right now its in cash form, it needs to go into something so its not sitting around here.

 

[biophase]

Chris,

I've always believed that the easiest way to do this is through real estate for people who wanted something semi passive. I ran these numbers years ago.

You go buy a decent property that cashflows (or maybe even breakeven, yeah I know, blasphemy!). Let's say you pick a $150,000 home with a fixed rate. After all, this is an 18 year investment right?

BTW, negative cashflow in this scenario doesn't suck either. Because let's say you were already going to save $300 a month for his college. You can put that into the investment property, a vehicle that you control. Not a stock or fund.

You go old school and put down 20% and let's just say it cashflows $200/mo. However, being a smart REI investor, let's assume that all your cashflow is used in maintenance. In 18 years, you are repairing and replacing a bunch of stuff in the home.

In year 18, you owe roughly $75,000 on the home.

Here are some projected assumptions:
Hopefully the home increased in value. Just say it's worth $200,000. Now you have $125,000 in the college fund.
Rents should have increased in this timeframe. So maybe you are bringing in $1200 a month cashflow now.

The main point of this investment style for college savings is that you are not saving money for college. What you are doing is making other people (your renters) pay you money for your kid's college fund. You put in $300 a month, the rent puts in $1000 a month. Much easier than you putting in $1300 by yourself.

PS. If you did this with a 15 yr loan, you would have the whole property free and clear 3 years before he went to college!

 

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[LightHouse]

Chris,

I've always believed that the easiest way to do this is through real estate for people who wanted something semi passive. I ran these numbers years ago.

You go buy a decent property that cashflows (or maybe even breakeven, yeah I know, blasphemy!). Let's say you pick a $150,000 home with a fixed rate. After all, this is an 18 year investment right?

BTW, negative cashflow in this scenario doesn't suck either. Because let's say you were already going to save $300 a month for his college. You can put that into the investment property, a vehicle that you control. Not a stock or fund.

You go old school and put down 20% and let's just say it cashflows $200/mo. However, being a smart REI investor, let's assume that all your cashflow is used in maintenance. In 18 years, you are repairing and replacing a bunch of stuff in the home.

In year 18, you owe roughly $75,000 on the home.

Here are some projected assumptions:
Hopefully the home increased in value. Just say it's worth $200,000. Now you have $125,000 in the college fund.
Rents should have increased in this timeframe. So maybe you are bringing in $1200 a month cashflow now.

The main point of this investment style for college savings is that you are not saving money for college. What you are doing is making other people (your renters) pay you money for your kid's college fund. You put in $300 a month, the rent puts in $1000 a month. Much easier than you putting in $1300 by yourself.

PS. If you did this with a 15 yr loan, you would have the whole property free and clear 3 years before he went to college!

That is actually a really interesting idea. The only issue it would carry is the proximity of where i live. There are no houses for $150k here, unless its a rehab cashflows are very thin, and with the metro coming out to where i live, the prices and demand are skyrocketing. So doing an RE deal local that I could administer would be out of the question.

I am wondering if it could be done further out though in the more rural areas which are still somewhat local. The other thing is putting the cash somewhere until it accumulates a 20% DP amount for a property.

I agree that amount would be great for college but if he decides to do business it would also be a sizeable investment he could utlize, so eitherway thats in the feild of the target number I am looking at using only the funding put forth for that purpose of his fund.

 

[OzGrinder]

Also I meant it literally too, right now its in cash form, it needs to go into something so its not sitting around here.

oh ok, I didn't think you meant actual paper money in that case I totally understand.

All term deposits, or online savings accounts beat inflation, at least over here, maybe not so there. Either way it's not just inflation, you also have to factor in...

Tax implications. I'm not familiar with US taxation, but over here you're limited to how much you can have in your childrens name without any realised gains attracting high tax rates. One alternative is to have it in your name, which means that any realised returns are getting taxed at whatever income tax bracket you fall into.

So to choose the most effective method you'll also have to consider your own financial position and tax obligations, which may change over 18 years as well.

 

[The-J]

All term deposits, or online savings accounts beat inflation, at least over here, maybe not so there. Either way it's not just inflation, you also have to factor in...

We get it, Australia's great and wonderful, you don't have to keep rubbing it in. 5% on a savings account is ridiculous in most economic conditions.

 

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[biophase]

I am wondering if it could be done further out though in the more rural areas which are still somewhat local. The other thing is putting the cash somewhere until it accumulates a 20% DP amount for a property.

I agree that amount would be great for college but if he decides to do business it would also be a sizeable investment he could utlize, so eitherway thats in the feild of the target number I am looking at using only the funding put forth for that purpose of his fund.

I have a place in SLC which would fit this method. It's around $130k and rents for $1k. However, I'm not sure if there is appreciation there. I bought at $140k, went up to $200k but now it's at $140k (with short sales at $110k). I also have a good PM in place. BTW, I'm not looking to sell mine as I'm holding these for long term, but you could take a look at them.

If you could lock in a super low rate like 5%, it would break even or cashflow a little.

 

[Rickson9]

Inflation, It would need to be atleast something the keeps up with inflation over the years, as cash it will just devalue. Also I meant it literally too, right now its in cash form, it needs to go into something so its not sitting around here.

Just speaking for myself, when investing I consider cash a bit differently. Instead of viewing it as something that declines in value from inflation over time, I view it as a call option with no expiry and no strike price. Warren Buffett best discussed it here:

"...to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced...He thinks of cash differently than conventional investors...the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

"...once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing....Suddenly, an investor’s asset allocation decisions are not simply between earning nothing in cash and earning something in bonds or stocks. The key question becomes: How much can the cash earn if I have it when I need it to buy other assets that are cheap, versus the upfront cost of holding it?"

Cash As A Call Option - Business Insider

To me, that is pure gold. It's one of those lessons that I could repeat until my death to slowlaners and they would never understand.

In short, I don't invest my cash simply because "inflation is eating away at it". I invest because I have found a distressed situation where I can take advantage of the market. Until then, I treat cash as a loaded gun - or call option. Cash can earn massive returns when deployed at the right time; so much so that it completely overshadows any inflationary concerns - especially in a low interest rate environment.

As an example, I had cash sitting around, waiting for an opportunity, getting 'eaten-away-by-inflation' (as I always do) and then the U.S. real estate market tanked. I took advantage and more than made up for the time I spent holding the cash. I have other examples, but that is the most recent one.

To answer the question of "where is the best place to invest one's money" is: it depends. It depends on which market an investor has an expertise in identifying a distressed bargain. If an investor cannot identify an advantage where they can make money from a distressed situation, then they shouldn't invest in anything outside of a savings account. As the poker saying goes, "If you have been in the game awhile and don't know who the patsy is - you're the patsy."

On the flip side of my investing - when I steal bargains from other investors, sometimes I ask myself who I'm taking from, and the answer is clear. I'm taking money from investors who needed to invest in something, anything, at all times, for fear of being 'left behind by inflation'. When the market turns and they panic. I take. Those are the people I'm taking from.

 

[OzGrinder]

Australia's great and wonderful, you don't have to keep rubbing it in.

In some things, in some things not. Rubbing it in? You can whack some cash in an Aussie account tomorrow if you wanted. They'll welcome it, so what's your problem?

Love Rickson9's comment on cash. In this instance though, investing in your child. Something that is set and forget with as little management needed as possible while beating inflation and minimising tax obligations is what most people look for.

 

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[Jake]

Gold for long term savings. It's not dependent on a counter party, company, or government.

 

[LightHouse]

I have a place in SLC which would fit this method. It's around $130k and rents for $1k. However, I'm not sure if there is appreciation there. I bought at $140k, went up to $200k but now it's at $140k (with short sales at $110k). I also have a good PM in place. BTW, I'm not looking to sell mine as I'm holding these for long term, but you could take a look at them.

If you could lock in a super low rate like 5%, it would break even or cashflow a little.

Yeah I would almost rather have something somewhat local because from what I have seen good PM's are hard to come by, so having something i can't access might end up a disaster and considering this isn't for my wealth its for the childs, a less hassle investment would work better, like a unit that is close that if need be i wouldn't stress about dealing with PM stuff myself if the PM fell through. I may look ino this option though.

 

[LightHouse]

Just speaking for myself, when investing I consider cash a bit differently. Instead of viewing it as something that declines in value from inflation over time, I view it as a call option with no expiry and no strike price. Warren Buffett best discussed it here:

"...to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced...He thinks of cash differently than conventional investors...the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

"...once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing....Suddenly, an investor’s asset allocation decisions are not simply between earning nothing in cash and earning something in bonds or stocks. The key question becomes: How much can the cash earn if I have it when I need it to buy other assets that are cheap, versus the upfront cost of holding it?"

Cash As A Call Option - Business Insider

To me, that is pure gold. It's one of those lessons that I could repeat until my death to slowlaners and they would never understand.

In short, I don't invest my cash simply because "inflation is eating away at it". I invest because I have found a distressed situation where I can take advantage of the market. Until then, I treat cash as a loaded gun - or call option. Cash can earn massive returns when deployed at the right time; so much so that it completely overshadows any inflationary concerns - especially in a low interest rate environment.

As an example, I had cash sitting around, waiting for an opportunity, getting 'eaten-away-by-inflation' (as I always do) and then the U.S. real estate market tanked. I took advantage and more than made up for the time I spent holding the cash. I have other examples, but that is the most recent one.

To answer the question of "where is the best place to invest one's money" is: it depends. It depends on which market an investor has an expertise in identifying a distressed bargain. If an investor cannot identify an advantage where they can make money from a distressed situation, then they shouldn't invest in anything outside of a savings account. As the poker saying goes, "If you have been in the game awhile and don't know who the patsy is - you're the patsy."

On the flip side of my investing - when I steal bargains from other investors, sometimes I ask myself who I'm taking from, and the answer is clear. I'm taking money from investors who needed to invest in something, anything, at all times, for fear of being 'left behind by inflation'. When the market turns and they panic. I take. Those are the people I'm taking from.

I certainly understand what you mean, but for purposes of this thread, I am not going to be actively investing his cash with opportune investment vehicles. This is over 18 years and is for a specific purpose, so when i say beating inflation I am talking about putting it into an investment vehicle that is low maintenance and appreciates while getting the best appreciation possible. I am not looking to have a higher risk for his situation so the idea of having the cash sitting around isn't there.

If it was for my personal investments, that is much, much more relevant and i agree, I wouldn't lock my own capital in low yield bonds or anything. It's used in active business or other investment vehicles.

 

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[andviv]

In my personal opinion, biophase's post is accurate, but you need to be comfortable with a remote property and rely on a PM.

Miami and Orlando are heating up again, for what I can tell, but again, the key is the PM.

 

[Rickson9]

I recently purchased shares in GES

 

[danoodle]

Come to Kansas, Toto. I know not every deal is like my 35k investment that gets $1150 per month or $13.5k that gets $475, but I just helped my brother acquire a property which will be around a 30k total investment and kick off $650 per month and can sell in a few years for a nice profit. There are plenty of deals to be had! Keep in mind, this is SFHs....I'm sure commercial and multi-family are even more lucrative!

 

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[kurtyordy]

I have let my kids' money sit in a saving acount up until now. My son turns 9 this month. We are currently filling out the pwork to open a scottrade account to allow him to start investing in stocks with the money in his savings account. Not sure this is the correct way to approach it, but I am excited to have him start.

My oldest daughter who turned 9 back in June is too scared of the risk right now and wants to see how her brother does. If he does well, there will be many potential lessons to be taught.

 

[The-J]

In some things, in some things not. Rubbing it in? You can whack some cash in an Aussie account tomorrow if you wanted. They'll welcome it, so what's your problem?

It was a joke

I'm considering it, honestly. But I don't have enough for 6% a year to be profitable enough. I still have to use my cash.

 

[emilybon]

In my personal opinion, biophase's post is accurate, but you need to be comfortable with a remote property and rely on a PM.

Miami and Orlando are heating up again, for what I can tell, but again, the key is the PM.

What do you mean by "Orlando heating up again"? I live in Orlando and I see the home prices that people are paying going up again. However, my home value has only regained 10K of the 180k that it lost when the market crashed. The rents are still the same. I would love to buy something as a rental but I don't have a down payment at the moment.

It looks really good to me: 3/2 for about 130-150k, 3-4% interest rates, probably a mortgage PITI for $800-900, with renting at $1200, renter pays for own water/sewer and takes care of lawn or you can pay for lawn care for $30 per month, homes are about 5-7 years old so little maintenance for at least 3-5 years. This is at least in my subdivision.

 

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[andviv]

What do you mean by "Orlando heating up again"? I live in Orlando and I see the home prices that people are paying going up again. However, my home value has only regained 10K of the 180k that it lost when the market crashed. The rents are still the same. I would love to buy something as a rental but I don't have a down payment at the moment.

It looks really good to me: 3/2 for about 130-150k, 3-4% interest rates, probably a mortgage PITI for $800-900, with renting at $1200, renter pays for own water/sewer and takes care of lawn or you can pay for lawn care for $30 per month, homes are about 5-7 years old so little maintenance for at least 3-5 years. This is at least in my subdivision.

I am sorry your property has lost that much value.

If you don't mind sharing, what subdivisions are looking good to you locally?

If I buy right now with the numbers you are mentioning, it is clearly a good deal.

And REOs and foreclosures are getting harder to come by, and people are going into bidding wars for those great deals.

These are clear signs to me that RE is getting hotter again in that city.

 

[AroundTheWorld]

What is your objective? Education for your children or safe investment of the dollars?

 

[LightHouse]

Come to Kansas, Toto. I know not every deal is like my 35k investment that gets $1150 per month or $13.5k that gets $475, but I just helped my brother acquire a property which will be around a 30k total investment and kick off $650 per month and can sell in a few years for a nice profit. There are plenty of deals to be had! Keep in mind, this is SFHs....I'm sure commercial and multi-family are even more lucrative!

Sounds like some good deals to be had, but like I mentioned, I don't think remote properties would work well for my intentions of low risk/stress type investments. If they were local I think it would be a lot easier. Are you presenting on those at BnP this year?

I have let my kids' money sit in a saving acount up until now. My son turns 9 this month. We are currently filling out the pwork to open a scottrade account to allow him to start investing in stocks with the money in his savings account. Not sure this is the correct way to approach it, but I am excited to have him start.

My oldest daughter who turned 9 back in June is too scared of the risk right now and wants to see how her brother does. If he does well, there will be many potential lessons to be taught.

Interesting idea! I think he would get a great deal of knowledge from that, I imagine it would be fun to check the stock for him as well. Perfect time to teach not to involve emotion into his trading otherwise he will check it and it will be down and a bad day ensues!

 

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[LightHouse]

What is your objective? Education for your children or safe investment of the dollars?

A low or fairly low risk vehicle to put cash into over 18 years. With the intention of having 100k plus for either his college education or to start a business or buy properties or whatever he decides he wants to do. I figured getting one of those college trusts may or may not be a better route, thus why i figured you all have had some prior experience with all this and have some different ideas. I am also wondering if a pre-tax type account (if they exist) would be better than an asset that could possibly appreciate faster and outweigh the benefits.

 

[Money mania]

Hey Lighthouse,

I know of a couple options that are good options I have seen out there. First one is each state has an State Prepaid plan that you can purchase "x" semesters now depending on how old your child is and that will cover cost of all tuition once they get to the college age, covers 100% of that states schools and can be used out of state also, may not be fully covered. Good way to get college paid for and out of the way. Here is a link I found. Virginia 529 - Virginia College Savings Plan | Virginia529 prePAID

Second I believe you can set up a Roth or Self Directed Roth IRA for you child if you can create a "job" for them to work for you and put that money into the Roth IRA, then grow that through real estate,stocks, businesses etc. Once they go to college you can use all that money tax free, double check with accountant to confirm.

Just a couple ideas I thought may be of interest.

MM

 

[LightHouse]

Hey Lighthouse,

I know of a couple options that are good options I have seen out there. First one is each state has an State Prepaid plan that you can purchase "x" semesters now depending on how old your child is and that will cover cost of all tuition once they get to the college age, covers 100% of that states schools and can be used out of state also, may not be fully covered. Good way to get college paid for and out of the way. Here is a link I found. Virginia 529 - Virginia College Savings Plan | Virginia529 prePAID

Second I believe you can set up a Roth or Self Directed Roth IRA for you child if you can create a "job" for them to work for you and put that money into the Roth IRA, then grow that through real estate,stocks, businesses etc. Once they go to college you can use all that money tax free, double check with accountant to confirm.

Just a couple ideas I thought may be of interest.

MM

Thanks! I had looked into a 529, the problem with it is, it is explicitly for the use of college tuition. I do not want to funnel him into that if that isn't what he chooses to do. So ideally I would like an investment that can be liquidated and turned into use able funds that he can use.

The IRA may work, but as a newborn I'm not sure I can include him as an employee? haha.

 

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[andviv]

it is explicitly for the use of college tuition. I do not want to funnel him into that if that isn't what he chooses to do.

What????

He must go to school, get good grades and find a safe, secure job!!!!

--sorry, couldn't resist.

Actually, I gave you speed for this.

Most parents worry too much about college when, in reality, we are not sure if it will be valid ten years from now.

In my case, one of my kids is an A+ student and already talks a lot about what to study in college. I am the one telling her, study whatever you want, and keep making money with your toys, bakes and lemonade sales. I want them to dissociate making money from the academic path they decide to follow.

 

[Steve37]

These are clear signs to me that RE is getting hotter again in that city.

For what it's worth i'm an active investor in Orlando and I'm starting to look elsewhere for long term buy and hold investments. There are still some decent deals to be had but there is a lot more competition these days and margins are getting smaller. In some specific markets like condos the prices are totally irrational and simply speculating on appreciation.

 

[Steve37]

I agree with those who recommend real estate. If you purchase correctly and lock in 4% money it's not out of the question that you'll have generated $100k in cumulative cash flow ( pre-tax ) by the time the tuition bills come around. That doesn't even factor in any mortgage paydown, depreciation, interest deductions, and potential appreciation.

 

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[emilybon]

I am sorry your property has lost that much value.

If you don't mind sharing, what subdivisions are looking good to you locally?

If I buy right now with the numbers you are mentioning, it is clearly a good deal.

And REOs and foreclosures are getting harder to come by, and people are going into bidding wars for those great deals.

These are clear signs to me that RE is getting hotter again in that city.

I am no expert in RE investing. But the subdivisions that look good to me are the ones that were build about 5-10 years ago that lost value in the property and are currently selling for under $150,000 and are over 3/2. These are also surrounded by still developing communities that are currently selling for about $100,000 more. About 10% of the homes in these communities are in foreclosure. Use Zillow to look at a map of Orlando and watch the values to find these communities. They are mostly found on the outskirts of the city.

Back about 5-10 years ago, they were building new homes that featured 3/2, 4/3, or 5/3 and had a family room. They started selling at $150,000 and the prices increased quickly to $350,000. The homes that were bought late in the boom are underwater with their mortgage. These are being sold by people who don't think it is worth keeping anymore as short sales or foreclosures. Some homes have been going under the foreclosure process for 2 years and are finally moving along into the final stages of foreclosure so there will be more homes showing up soon in foreclosure.

There are also new homes being built that are now bigger and selling for the same amount that you would have bought the smaller homes for. Seems the builders want to keep the same prices that they left at at the end of the boom so they are building bigger homes to show the value. Therefore, the smaller homes that lost value will never regain because of the new bigger homes competing in value and price, unless the overall market prices go up.

However, when you buy a house that was built before the big hurricanes hit Florida (about 6-7 years ago), you will not get the new construction requirements to protect the home from hurricanes that came out after that. One is that the walls seep water if there is rain ongoing for days (depending on the builders). The newer homes require a seal on the concrete walls to prevent water damage. But you can always add a seal to the older homes and will probably cost 2-5k. So one caveat is check homes for water damage and mold before you buy.

Just my opinion, I am no expert, just live in the area and pay attention.