First Investments for Adult Children – Episode 576

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. Recently, we talked about helping your children, adult children, with finances, and that does not mean paying their bills. So once the habits of savings and other things are in place, it’s now helping them to accumulate wealth. And that often can be a side business. It can often be alternative investments. Kim, let’s navigate that world because those two are different, but they both require some very similar skills and disciplines. So let’s tackle that together. Well, I love this space. And it’s interesting, the word alternative investments has become fairly popular of late. It is tricky because many alternative investments, so this is basically anything

[00:50] that’s not a stock bond or mutual fund, often require for the person to be accredited. And so accreditation defined by the SEC, I believe, is who puts these rules out is a million dollar net worth, not including your primary residence or two to three hundred thousand of income, three hundred thousand if you’re married, two hundred thousand per year if you’re single. So most young adults are not going to qualify for that unless they happen to get a really good job and have that level of income, which is absolutely doable, just not the norm. And so I think it’s important that people become aware that while alternative investments sound really fun and unique in many cases, it’s not going to be the

[01:38] space for most people. Now, there are some nuanced alternative investments, for example, like real estate rentals. There’s even real estate syndications that do enable a non-accredited investor to invest somebody that has maybe fifty thousand or something like that and doesn’t meet the income requirements. And I should have said earlier, most alternative investments, minimums or one hundred thousand, many of them are quarter million, many of them are a million. So you’ve got that whole thing going. And most of those alternative investments require that you have one hundred and fifty thousand dollars of cash elsewhere, not what you’re going to invest in, but cash elsewhere in order to get into the alternative

[02:25] investment, because most alternative investments are not liquid and they don’t want you coming to them because you need to put food on the table or pay your tax bill or solve other general cash oriented problems. So interesting in space, one that I love to help that older set with the higher income. Where do we store that cash is the big question there. But going back to our young adult, it’s interesting how much of a focus is on rate of return. So people are looking at rental properties. They’re looking at their mutual funds. They might even be looking at their retirement plan at work. They’re looking at what their friends are doing for investments. You’ve got everything investing can be done literally all over the board

[03:14] these days. You have cryptos, you have art, you have all kinds of things you can invest in and they’re focused on the rate of return. And we can use Todd Langford’s Truth Concepts Maximum Potential Calculator. And I’ve got some YouTube’s on this, so maybe we’ll find one and link it in the show notes to prove that it’s not so much the rate of return that you’re earning. What makes a difference in terms of building wealth, especially early year foundational wealth, foundational meaning you’re not going to lose it, is the amount of dollars that you’re saving. It’s not the interest rate that you earn. And so for a lot of people, learning about investments is where they should spend their time, but just saving is what they should do with their money.

[04:15] And so if saving to you, so I’m differentiating between saving and investing, if saving to you as a bank, then please go do that. If saving to you is a whole life insurance policy, then please go do that. And if you need help with that, my team can do the work that would educate you on utilizing whole life insurance as a savings vehicle. If saving to you is money under your mattress, then please go do that. If saving to you is a bond because that treasury bond or T bill, something like that’s sometimes a next step. I bonds some people that’s fine. Please go do that and keep learning because time spent learning about yourself will enable you in the future to pick better investments. So spend a little time learning about investments, spend a little

[05:10] time learning about yourself, spend a little time learning about investments, spend a little time learning about yourself, and you will set yourself up for financial success as you go forward. And that was the clip. That was awesome. Really good. There’s a couple of things that I want to pull out of there. One is that requires a growth mindset. And on the flip side of that means that you’re looking at failure through a different lens. So let’s get your perspective. What does failure look like if you’re continuing to work from what you just said? Failure is just learning and sometimes it takes losing money to learn. There’s a saying we pay attention to that that we pay for. So maybe paying for a course will enable you to learn more.

[06:06] Maybe putting money in an investment and losing it will enable you to learn more. Maybe purchasing a book will enable you to learn more. When you said growth mindset, Carol Dweck’s book came to mind. Dweck, D-W-E-C-K, fabulous book on growth versus fixed mindset. And it’s changeable, which is such great news. Nevertheless, as we progress, we’re going to encounter failure. It is a part of life. And so how you deal with failure is way more important than how many times you’ve actually failed and that ability to get up again is critical. Quick story. I had a little accident on my bicycle a couple of months ago. And I knew that there was going to be a time that I needed to get back on that bike and go the same path that the accident was caused on, which was down

[07:02] a hill with gravel that was loose. And so I got a chance to ride a bike a couple of weeks ago on a flat path. It was very nice. Got my bike skills back in my brain. Right. And then just this morning I tackled this downhill loose gravel path. And I just really held the whole time to, I can do this, I can do this. Right. Because any kind of fear in my body, which would be normal, but as a mental thing would disable my ability to actually do what I needed to do. And so investments are really no different. I mean, there’s going, if you are investing, which means you’re doing some gambling, then there are going to be losses and it’s how you deal with those, how you learn from them, what your other money is doing along the

[07:52] way to give you that foundation that I spoke about. And then it’s also really important to look holistically at your finances because everybody loves to brag about their investment that did awesome. Nobody talks about their investment where they lost money. I mean, it’s embarrassing, right? Why would you talk about that? And yet most investors have absolutely lost money. And also most investors have foundational money. The zero to 5% assured money, certain money that is cash value of life insurance, savings in a bank, maybe a bond, but they never look at those two together, so you might have some awesome 10% real estate syndication that you do. But the fact is you’ve got cash at two, three, four, 5% that you have to

[08:39] look at also, you can’t just talk about the 10% syndication and then forget about this other real estate deal where you lost money or this other business where you lost money or the various places that people invest and lose money, nor can you forget about the cash that you must own. So again, if you’re in that younger set, build the cash that you must own first because that puts control and liquidity and the ability to pivot the ability to use the money like you want, even make it act like equity, meaning borrow against it. I have a little acronym that I talk about clue, control, liquidity, use, and equity, build that up first while you’re doing the learning about the investing and about yourself.

[09:25] Okay. Very solid advice there. There’s two points that I wanted to go deeper on. One of them is, I think it’s a critical thing that a lot of people were calling younger when you’re ambitious and when your friends are doing well with their investments, or I should say the investments they’re talking about when those are going well, that they’re willing to go all in on something and you should never go all in on the money that you’re going to be using to live. So if you don’t have the savings or if you don’t have the investment money set aside, please don’t do that. How long has it, have you seen it take most young adults to get their emergence or emergency in their savings set aside? Yeah. Well, let’s pretend you didn’t have a grandpa or parent that gave you a head

[10:15] start or you’re coming out of either high school or college with basically nothing and you want generally people say three to six months. I think if you’re just starting out having more like six months to a year of your expenses is what you should be shooting for as your savings account, as your emergency fund. Well, here’s the thing. You are used to as a high school or college student living on very little. So just keep doing that for one more year. And likely in a couple of years, so maybe two more years would be a better way to say that you will have your emergency fund handled. This is boring. I get it. And people so want to get onto the fancy stuff, the sophisticated stuff, the exciting stuff, but having that ability to have that emergency

[11:10] fund to enable you to pivot, to quit that job, if it’s not fitting you to solve an emergency is so, so important. And if you need a year as expenses, it’s going to take you probably a couple of years to get there. And that’s if you’re fairly frugal, then you can start to elevate your lifestyle and purchase more of the things that you want to have. And that’s not the fun way to do it, but it sure is the appropriate from a financial standpoint way to do it. Yes. So that leads to the last and final question, which I’ve heard others talk about often, which is this. Let’s say you’ve got your emergency fund set aside. You’ve developed the habit of savings. Maybe you just kept saving a little bit longer because you

[11:56] didn’t know what to do. You see an alternative investment. You have the capital for it. Would you suggest that they go in with an alternative investment first or use the education and the experience and do something on their own? So again, it really depends if they’re an accredited investor. Great. Let’s say they ended up with one of those jobs that can happen. They’re single. They’re making over 200 K here. The credited investment, the accredited investor requirement is met. So now the alternative investment is available to them. If they’re comfortable and they’ve got the capital, because again, you’re usually talking 50 to a hundred K minimums, if not many more dollars than that, I don’t have a problem with that being the first step.

[12:40] I don’t think that’s normal though. So I’m going to say for most people, their own education is probably the next best investment while they continue to learn about other investments, and this doesn’t take into consideration the home buying because clearly any young person, if they’re really set on buying a home, everything’s going to have to be focused on that down payment. And so great, then that’s what you need to do. Save the money. The dollars that you save are way more than anything you would invest in because anything that you would invest in, you could potentially lose. And then you’re back to square one. Assuming all that’s met, like I’ve got a young couple, their grandpa gave them money that was sufficient for meeting the emergency

[13:25] fund and funding a down payment on a 3% first time home buyers loan. Great. That’s handled. Now they can go straight to investments, but they weren’t accredited. So what are they going to do? Well, they have 500, a thousand a month. Your basic index fund does work for that just fine. However, what they chose to do is continue saving because they really wanted to be a real estate investor, which means they needed to buy the next piece of property, which they were not going to get a 3% down mortgage on. And so they saved up that money, did the down payment, got that rental property, started to save the rental income that was over and above the mortgage and now they’re saving for their next property.

[14:08] So that’s a totally different approach that is very doable and cause them to not want to do your typical hundred, 500, a thousand a month into an index fund because they knew that money could go down. They wanted to just save in a savings account. So they knew that money was there so that they could put the down payment on that residential rental real estate. And again, there’s some education. There’s other places out there that you could do that kind of deal with without having to actually buy the house. Oh, I love that. I really do because there’s always another alternative. Other piece, Kim, congrats for getting back on the bike, for being here, accomplishing that. Uh, what that does is it shows it’s coaching right there.

[14:55] You knew that you had to face it. You did it. You’ve gone through it. That power speech was great. And for all of you listeners, I asked that question because a close friend of mine, his first job out of school was a job at Google and that required everything and there was no opportunity to go and start this side business or do those other things. It had to be alternative investment a couple of years after. Now that’s not always going to be the case. But again, for anyone that they’re a question mark on what they’re doing, send an email to hello at prosperity thinkers.com. The way, if you have the inheritance or if you have the good paying job, or if you’re just trying to make it happen, there’s a situation for all of you.

[15:37] So hello at prosperity thinkers.com. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit prosperity thinkers.com.