One of our core goals at The Motley Fool is to help people become great investors, and the earlier a person starts on that path, the better his or her long-term results are likely to be. That's why we consider it a smart move to get your children -- or any younger relatives -- involved in stock picking long before they're really likely to be thinking about the future. Of course, not everyone's parents get their portfolios rolling when they're infants, or even grade-schoolers.
In this Rule Breaker Investing podcast, David Gardner has gathered a whole panel of Fools to discuss the best ways to get started guiding your young relatives into the wide world of Wall Street. David, along with Naima Barnes, Daniel Messeca, Robert Brokamp, and Jason Moser, will offer up tips, advice, and a host of personal anecdotes. In this segment, they talk about what the 18- or 21-year-old in your life ought to be doing -- from contributing to a 401(k) to opening an IRA to getting out there and choosing his or her own portfolio, and more -- as well as some things Mom and Dad may want to help out with.
A full transcript follows the video.
This video was recorded on Jan. 2, 2019.
David Gardner: Well, we've been promising Chapter 3, so let's now advance to Chapter 3. Now we're at the age where you're getting somebody started investing. You weren't ready for them when they were newborn and you may have had some of these conversations. Maybe there was part of the Gardner/Brokamp alliance of lame allowance approach.
But here you are finally and darn it, this person has just graduated high school. They've got a diploma and a smile on their face. Or maybe college. Or maybe just a little bit after that. So we're talking about adults or near adults and getting them started investing, and certainly that's true of many people hearing me today. And a few months hence it's going to be graduation time all over again. Yes, the winter will finally thaw and spring will spring anew, so let's talk about that stage of life and getting "kids" started investing. Daniel?
Daniel Masseca: It's funny that you were talking about matching a moment ago, because if you're the parent of a college-age student or a recent graduate, what I have actually seen the most often is those are the people who you motivate through matching, because they don't have money to invest themselves at that point, and they really don't want to siphon off funds when they need it for anything else. So I've seen a lot of parents trying to motivate them to put dollars in, by matching dollars in those instances, when they might not have been brought up to save on their own.
Gardner: That makes a lot of sense. So in addition to that first job that they're hoping to get after high school or college, and have a matcher in their employer, we could do that as parents, or aunts and uncles, or whoever we are.
Robert Brokamp: And I do think it's important that if they are starting a job -- they've just graduated from college -- you have that conversation about the 401(k). You say, "Listen, that's one of the first things you should do." Most plans do have a match. You want to sign up as soon as possible.
The thing I've told my kids, over and over again, is if you want to retire in your 60s you've got to save 15% of your income as soon as you start working, and that includes the match. So here at The Fool if you contribute 9%, the Fool matches 6%, and you hit that 15%. I've drummed it into their heads that as soon as they start working, they've got to save 15%.
Naima Barnes: And even if you are unable to save the entire 15% you may not want to discourage people who are in that situation in the beginning. It's being able to get the match and get 100% of the match. If they match 100% up to 6%, you want to get that 6%, so make sure you put in 6% and then you'll be able to get some free money.
Brokamp: Even to the point of helping them fill out the forms, because I think that's one of the big stumbling points with a lot of financial planning stuff. Whether it's applying for life insurance or opening a brokerage, they look at these forms and they don't even know how to answer some of the questions -- the beneficiary designation and stuff like that. Help them with the paperwork to get them over that hurdle.
Gardner: Yes, I was wondering about that, Robert, because we talked earlier in the show, in chapter one, about those different types of accounts you can start, and we gave you a few marching orders, I hope, to do that. What is it like when you've got an adult on the other end, let's say a 22-year-old? Can you fill it out for him or her or, darn it, should they be doing it at that age themselves? If it's intimidating, how do we march people into an office and get them to sign a form to get it going?
Brokamp: Well, I've been helping my oldest daughter, who's in her twenties, open up a Roth IRA. I would say you do it together. I told her where I think she should do it. I told her, her investment options. I'm not going to tell her how to invest, but these are the investment options. Center the link. She's going to be at our house tomorrow night and we're going to seal the deal and make sure she's taking care of it.
Gardner: And I'm sure you've written yourself in as the beneficiary designate.
Gardner: And that's why you're in this process.
Barnes: My sister recently got a new job and we had a conversation about everything from picking her health insurance to deciding whether she's going to get life insurance through her employer.
Gardner: Will you come over to my house, Naima? It's not just her that would benefit from some of that.
Barnes: Yes, so definitely doing that. And then talking to her about the importance of using her 401(k). She's also planning a wedding, so being able to create that budget so that you can save for the wedding since that's going to be something coming soon. But also being able to help save for your retirement, even though it's many years away for her.
Gardner: Naima, earlier today in Fool HQ we had a Fool School, one of our Fool School sessions. We had some 22-ish-year-olds in there and we were speaking to them. You were there, because you're one of our heads of Fool School, and Jason, you've done a lot for Fool School, too. I know that you're both experienced talking to people of different ages. Naima, what are one or two things that you said to the young man who came and visited us earlier today that would be applicable to anybody listening here?
Barnes: The biggest thing we talked about today is that anyone can be an investor. A lot of times the message is that you have to be something who is older and knows a lot about money in order to invest, but you can be someone who works in any type of position. It doesn't have to be a position where you're making $1 million a year or some six-figure amount.
We also talked about the three things that they can potentially do today and getting started as soon as possible is one of the biggest things outside of the three things. We talked about the three accounts that they can open in order of importance with one being the employer-sponsored plan if their employer offers that.
Gardner: So if they can only open one account, you would say that type of account first.
Barnes: That would be the one I would say first.
Gardner: Because your employer is matching.
Gardner: I heard you say free money.
Barnes: Free money. You want to get free money. Who doesn't want free money? Then second, if you're preparing for retirement; although it is very far away for people who are in their twenties, it still should be something that you keep on your mind because I know that I want my seventy-year-old self to be able to enjoy her life and also be able to help her children and grandchildren when she does decide to have them. So being able to use a Roth IRA or a traditional IRA to save for retirement after your plan from your employer.
And then for shorter-term goals I like to use just a taxable account or for things that are going to be outside of the amount you can put in an IRA. I like to use the taxable account for that, too.
Messeca: That was my first financial planning lesson -- when I was 19 years old and got my first job in college -- was learning the power of the Roth IRA. My uncle made me read a book, building your Roth IRA wealth, and it was really eye-opening about the power of compounding with an account like that. That's when I opened my first account and started putting some money of my own into a Roth IRA and investing there.
Gardner: Obviously at Fool.com and other resources, too, you can read a lot more than we can cover in a given podcast, but I think the headliner there, Daniel and everybody, is that the Roth is often a great choice for younger people, the ones we're talking about right now in Chapter 3, because you're paying a tax up front on the money that you put in.
This may sound like a bummer, because if you put in $1,000 you have to pay like $200 of it right up front. You're only getting to invest $800. But here's the good news. You let that money compound over a few decades and there's no tax you pay on the other end, so the math works out wildly in our favor often if we go with the Roth IRA for young people.
Moser: And I think it's probably worth considering having a little bit of everything. I loved your approach of a nice, taxable brokerage account where you'd have the ability to do some stuff with that money as you're living your life. I have the same and it helps when we want to travel or go do something. Then I've got my retirement account here with the Fool, and that's a Roth 401(k). And then I have a conventional IRA that is just all of the different jobs I had before, where I rolled over the retirement savings that I had accrued from those jobs.
So you have a little bit of it all, and it does make a difference, because with those conventional IRAs, once you start taking that money out, and you eventually will have to, you're going to be taxed on those withdrawals, whereas with that Roth, you're not going to be. So it's nice to have a little bit of diversification there, which is, of course, what we preach when it comes to stocks as well.
Brokamp: And so many younger kids, especially if they're working in high school and college, are not making enough money to even pay taxes. They're making less than the standard deduction. You wouldn't be paying taxes anyhow, so the Roth is a no-brainer in that situation.
Gardner: Well, I feel like we're getting near the end of our conversation. This has been a lot of fun. More importantly, though, I hope it's been really helpful for you, our listener, whether you're listening to this in January of 2019, when it was originally taped to start the new year. What better way to start a new year, if you're here around Fool HQ, then to have this conversation? Or maybe you're hearing this months or years later. I hope that this information and maybe beyond information -- perspective -- maybe a little bit of wisdom here from The Motley Fool is helpful for you.
Let's close this way, team. Let's go with our final bit of advice. So reflecting back on the conversation we've had. Also if you think we've missed anything. I don't want any listener to feel like, "They never talked about this or that." Any final thought or suggestion. Let's start with Naima.
Barnes: I'm going to go with two. One is start today. Start today. And then the second thing that I didn't mention earlier is a great platform called Stockpile that is really cool for gifting. A grandparent, parent, an uncle -- instead of giving a holiday gift -- why don't you give them stock? You can buy gift cards from Stockpile from denominations of $25 up to $2,000, and that's pretty cool. Then they can go and invest, even in fractional shares through their website. They also have ETFs.
Gardner: They're also not sponsoring this episode of Rule Breaker Investing, but Stockpile.com, spelled as one would expect. It's fun, because you can give a gift card, except rather than get $25 off at Starbucks or Chipotle, you can actually get $25 toward ownership of Starbucks or Chipotle. I think all of us around the table and I trust many of our listeners realize which is more valuable 10 years later.
Barnes: It's pretty cool. And they do also offer custodial accounts, as well.
Gardner: Well, that makes a lot of sense given their business model. Thank you, Naima! A delight to spend time with you this podcast. Daniel?
Messeca: If I were to give advice for helping a kid get started investing, my two things would be to keep it simple. They don't care about Roth IRAs or custodial accounts. They don't need to know. Just do it. The other would be to make it fun and make it engaging. Make it something that they can relate to. That way you're building a passion instead of just something happening in the background.
Brokamp: I will piggyback on what Naima said and that is just to do it. Our biggest mistake was to try to find the perfect solution and the perfect investment, and we procrastinated too much. We funded accounts, and I felt all this pressure that these are our kids' first investments and I want to make sure we get it right. In the meantime that money just sat in cash for too long. So don't worry if it's not perfect. Whatever investment you pick will teach a good lesson.
Moser: Those are really hard to top, so I'm going to try to expand a little bit.
Gardner: That's legit. I'm doing the same thing.
Moser: I'm going to actually show we do have a video component I think, right?
Moser: For those watching on YouTube.
Gardner: Yes, we're on YouTube!
Moser: When we're talking about gifts, holiday seasons, birthdays, they're a great time. I love stocks as a gift idea. You don't have to pick them up off the floor. They don't require batteries. They're not going to break. And it's as easy as just transferring from your account over to their account, too.
Gardner: Love it!
Moser: And you print out a nice certificate. See, that's what I'm giving my daughters. Their mom and dad are giving them five shares of Square each. And they know Square because they see it everywhere we go. They realize, "Oh, you're paying with Square." They see the Square stuff there. I think giving stocks as gifts is just an awesome idea. I love it. And you don't have to worry about that matching thing, David. You're just giving them all that money right up front.
Then to Daniel's point, keep it fun. I mean, going back to the very lesson that introduced my daughters to it, and I've told this a million times, but it never gets old. It was just us going to lunch at a Panera one day. They were five and six years old, and I told them that we happened to own a little piece of that restaurant. They couldn't believe what I was telling them. And of course, it was just through Panera shares ownership, but that's what got that discussion started and it kept it fun.
So from there they see their portfolio, and they see that as these are all the businesses that they're owners of, and these are the businesses that play into their lives in some way, shape, or form. That keeps it fun and that keeps it interesting.
Gardner: Often people say last but not least, but I'm going to go with least, because I like what you all said. So last and least, I'm going to say that a lot of what we've talked about is about touching off and getting somebody started. Switching that person on. But after that, the rest of the game is about staying "in the game."
So if we've made any mistake with this podcast, we gave you some scaffolding. We gave you a guide and a little bit of inspiration to get somebody started. But really, it's about staying in the game. It's about saving. That's the hardest thing to do in our world today.
The reason most of the world isn't an investor today isn't because they trade in and out of the market. Some people do make that mistake, but really, much of the world isn't in investing because they don't have capital yet, and that's because they haven't learned to save. And we've seen people in desperately poor circumstances be net savers and it's always very inspirational to me and to us here at The Motley Fool.
So I believe anybody can do it. You can do it. You can do it on behalf of a younger person, as we're talking about here. But it's about saving and then it's about adding and making a lifetime commitment to your financial future or, in this case, that of somebody else's. Making it clear to them that even if it's a bear market, and even if 2018 didn't end well for the stock market, who knows about the future? Whenever you're hearing this, who knows what it holds, except that I think it's going to be better and especially if you give it time.
For Naima Barnes, for Daniel Messeca, for Robert Brokamp, and Jason Moser. I'm David Gardner wishing you the very best at touching off positivity in somebody else's life. Somebody younger than you -- maybe more than one person -- and getting him or her started investing.
Naima Barnes and Daniel Messeca are employees of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The views of Naima Barnes and Daniel Messeca and Motley Fool Wealth Management are not the views of The Motley Fool, LLC, and should not be taken as such.
David Gardner owns shares of Chipotle Mexican Grill and Starbucks. Jason Moser owns shares of Chipotle Mexican Grill, Square, and Starbucks. Robert Brokamp, CFP owns shares of Starbucks. Daniel Messeca owns shares of Square. Naima Barnes has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Square, and Starbucks. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.