First of all, if your father is Warren Buffett then you can disregard everything I say in this blog post. For the rest of us, giving your parents all your money to invest for you is a bad idea. It’s not bad because I’m saying your parents are going to steal your money or go invest it all on pumpkins. Our parents have our best interests at heart, but they are actually making it worst for their children.
My Own Story
I’ve been in this situation. When I was a high school and college student, I had my parents do all the investing of my Roth IRA funds. It was a good idea at the time since they obviously had more financial experience and it let me focus on what was important, which was homework and not flunking chemistry. After graduating from college, I started my own business and focused on that while continuing to let my dad manage my Roth account.
Then one day when my dad was out of town, I got the mail and saw my monthly statement had arrived. I opened the envelope and I had just over five thousand dollars in the account. That wouldn’t have been bad, considering 65% of Americans save little or nothing. But I had made an annual contribution of $5,000 less than five months before.
Where did all those years of Roth IRA contributions go? Turns out my dad had purchased a bunch of call options, which then expired worthless. Doh.
Why You Need To Manage Your Own Money
Now, I get it. When we invest our money in anything, there is always a chance we could lose money. It has happened to millions of people during the dot-com crash in 2000. And again in the Great Recession of 2008. That doesn’t mean we should keep all our money in a saving account and earning so little interest that it won’t keep up with inflation.
Once we are out of college and start working at our first full time job, we should start learning how to manage our money too. It’s simply part of being an adult. This includes paying bills, balancing our checkbook (remember those?), and investing for the future.
Yes, you might make some mistakes in your financial life and lose a few hundred or thousand dollars. Don’t look at those small mistakes as failures, but as investing in your financial education. It’s better to make those mistakes now than later in our lives. The best way to learn how to do anything is by doing it hands-on. When we are young, we can afford to lose a bit of money here or there and be more aggressive with our investments because we have decades until retirement.
Another reason why you should be the one choosing where your money goes is it makes you more accountable. When you give your savings to your parents or someone else to invest, you may not check up on your investments as often. You don’t know what stocks and funds it has been placed into. It becomes an out of sight, out of mind mindset. If you want to have good financial habits, you need to know what is going on with your money. No one cares more about your money than you do. This includes financial advisors who are getting a commission for investing your money into certain mutual funds.
A drawback of having your money sitting in an account owned by your parents is you never really know how your investments are doing. If their entire portfolio was up 50% for the year, how did the portion of your money do? Keeping track of everything is a huge mess when there are multiple lots purchased at different times to account for. With your own account, you’ll be able to login and see immediately how much money you have right at this moment.
When our stocks are going up, everyone is happy. But what happens when something turns out to be a bad investment? Will you be mad at your parents for losing your money? Will your parents feel guilty about it afterwards? Many relationships have been ruined because of money. My philosophy on giving people money, whether it is for a loan or an investment is don’t expect to get any of it back.
As your parents get older, you shouldn’t be depending on them to be in charge of your money. At some point in your life, you might even end up being responsible for their money. We’ve all seen stories about seniors conned out of their life savings by scammers or sketchy charities. Many seniors have trouble paying their bills on time, have difficulty with simple math problems, or end up draining their savings accounts on compulsive purchases as their cognition declines. If you’ve never learned how to manage your finances, both you and your parents will be up the creek.
Lots of people make excuses on why they don’t want to be responsible for their own money. I don’t know how to invest, they say. I don’t want to make a bad investment, they say. I don’t have the time, they say. Yet everyone has no problem going on a weeklong vacation every year. Investing is much easier than most people realize once you’ve done your initial research. It’s called buy and hold for a reason.
To make it really easy for a new and busy investor, take your age and subtract it from 120. This number is the percentage of your funds to put into stocks. Put the stocks portion into a total U.S. stock market or S&P 500 index fund. Take the rest of your money and put it into a total bond index fund. Then once a year, look at your age and your stock/bond allocation. Rebalance as necessary. Done.
Finance should be a skill that is taught in school, but this isn’t always the case. Thanks to the Internet, financial advice is now available right at your fingertips with personal finance blogs, podcasts, discussion boards, and videos on YouTube.
By all means get advice from your parents and family if they are good with money. Then do your own research and make your own decisions. Like the rest of the things in life, you’ll never learn if everything is done for you. Start learning now and your future self will thank you.