Money Rehab with Nicole Lapin - How Do I Provide For My Family's Financial Future?

Episode Date: August 30, 2021

Today’s listener wants to know how to set her lil nieces and nephews up for financial success... but she’s sick of the boiler plate advice: “Save for college and they will live happily ever after!” Today, Nicole is serving up some fresh tips. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. In our What to Expect When You're Expecting episode, we talked about different ways to

prepare for how your little one will make big changes to your spending plan. One topic we covered was how to use tax-advantaged savings accounts to prep for the monstrosity that is college tuition. But here's a question. Will the current student debt crisis affect how the next generation views college? Specifically, is the prospect of student debt deterring future generations from even wanting to go to college? One money rehabber wants to prepare for that future. She asks. Hi, Nicole. Loyal listener. First time DMer. I have a question for you. I'm trying to figure out the best way to put money away for my nephews and niece. I'm so

sick of buying them dumb toys. And my six-year-old nephew literally made fun of me for buying him clothes for his last birthday. Evil, I know. So my question is this. What is the best way to put money away for a child, even if that child isn't yours? My wife and I will not be having kids, and I know first I need to take care of us, right? No debt, savings account on fleek, and retirement fund flourishing. After that, how do I help these kids out? I do not want to do a college savings plan. I'm so against just assuming all 18-year-olds will hop off to college and endure more debt, just like all of us millennials did.

I want them to have money for their future, maybe home, car, or whatever they'd like. You've mentioned government savings bonds, but anything else I can look into? Thanks and love listening to your pod. I love this woman and this question so, so much. Yes, we do want that emergency fund on fleek. Girl, you get me. I also totally understand not wanting to assume that college will be the right move for your niece and nephews. However, if you do want that to be your approach, I think you should apply it universally. In other words, if you don't want to assume that the kiddos will go to college, you also shouldn't assume that they will want to buy their own house or their own car. Maybe they'll be avid motorcyclists or live in a tent

or a yurt. Who knows? But it sounds like you want to give them the gift of freedom. Freedom to make their own choices and the financial freedom to afford those choices. I would say that building financial freedom can be broken down into three major missions. One, getting the capital. Two, building credit. And three, practicing financial literacy. So let's go through these three missions and figure out your strategy to help. On the first order of business, having the capital for financial freedom. I know you want to give them money as a head start, and that is awesome. You are the coolest auntie in all the land. But I wouldn't actually recommend giving them money or just putting money in a savings account for them

because when they're ready to take it out, that money is not going to be worth the same amount of money. That's okay. There is an easy way to protect against this. That is with government bonds, not just any bond, James Bond. Just kidding. Actually, I would recommend TIPS. TIPS stands for Treasury Inflation Protected Securities. TIPS is a type of government bond. It's issued by the federal government, and it has a fixed interest rate and principle that varies with inflation. So basically, TIPS are used to protect your money against fluctuations in inflation. And inevitably, by the time your niece and nephew grow up, there will be some of those. So you can protect them against that with tips. The principle rises and falls, and it comes back to you in semi-annual

payments as the Consumer Price Index rises and falls. The Consumer Price Index, by the way, or CPI, is the index that looks at a smattering of a bunch of different type of staple goods like food or medical care or transportation. It tracks their prices over time to determine if inflation exists at a particular moment. Hold on to your wallets, boys and girls. Money Rehab will be right back. Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more Money Rehab.

I know that we covered this in our recent episode with James, but if you need a little refresher, inflation happens when the cost of goods is more expensive than it used to be. It's why movie tickets were $5 when we were growing up, and now they're $15. The good is the same, but the cost is higher. Conversely, deflation is what happens when stuff costs less than it used to. Yeah, that can happen. It did during the Great Depression and even a little during the Great Recession. While it sounds great to have things cost less, it's pretty bad for the overall economy as falling prices lead to lower consumer spending. Inflation and interest rates move together. When we're in inflationary times, interest rates go up. When we're in deflationary times, interest rates go down. Here's how tips

protect you. If you buy $1,000 in tips and the interest rate is 1%, you get $10 in interest payments. If inflation stays the same, then nothing happens. But this is my favorite part. When inflation goes up, say 5%, your bond is then worth $1,050 and your payment then goes up to $10.50. your payment then goes up to $10.50. I know that 50 cents doesn't sound like a lot, but if you own more tips and inflation gets nutso, then that is real money. Investors who think we're headed for inflationary times will typically buy up a lot of tips to take advantage of the increase in inflation and corresponding increase in their return. Just as tips can adjust up with inflation, increase in their return. Just as tips can adjust up with inflation, they can also adjust down during deflationary times, which we don't want. It's tricky to predict inflation, of course. So the best way to balance these forces is to first not hide from them and second, balance the amount

of tips with what you would buy in traditional treasuries like T--bills, T-notes, and T-bonds. The whole T-crew. Why? I know you know this answer, but I will tell you anyway just to bring it all full circle. When interest rates go up, inflation typically goes up too, causing tips to go down and traditional treasuries to go up. No one really knows what will happen with interest rates or inflation in the future, of course, even with all the charts and all the curves and all the analysis in the world. But if you have both, then you are hedged. You are fully protected from any inflationary situation. My parents weren't into that sort of thing. Cash was the only form of money in our immigrant

household. But I wish they had been. Now, as an adult, I buy my friends' kids stocks or bonds instead of onesies. I love a onesie. I had a whole birthday party when I was 34 years old wearing onesies. But it's a way better investment to buy them a stock or a bond. They will appreciate it more when they grow up. That is truly the gift that keeps giving. So I'd recommend that is where you start with your family because you're the cool auntie,

of course, and tips are like a new thing compared to savings bonds, which typically you see given to children. You might have even gotten one when you were a kid. Those are, by the way, through treasurydirect.gov. Those are the ones that mature in 30 years. They must be held for at least one year. And there are two kinds of savings bonds. Series EE that pays a tiny interest rate like 0.1%. Series I that protects your money against inflation with this combination of semi-annual inflation rates and a fixed interest rate that could actually be zero. So when you take out the money, it's adjusted for the value of the original money in present day value. Let's move on to our second mission, building credit. Here, I would recommend opening a credit card for your niece and nephew in their name when they turn 18. Add yourself as an authorized user because, of course, you have stellar credit and keep the account on the down low until your niece and nephew turn 21 or so. In other words, I would

tell their parents, of course, but I would keep their credit cards a secret until they're at the age when you're super confident they won't go overboard and adopt their own little debt monkey. Over those years, I would use that credit card for small-ish recurring purchases like your cell phone bill or other utilities. Then when your nephew turns 21, boom, he's an adult with a killer credit score. That's a huge head start right out of the gate into the real world. This move might be a little tricky to keep secret if your niece and nephew are looking at the emails from their bank too closely. So you may have to spill the beans. But the gift here would be to build that credit for them until they're ready to take it over. Next, let's look at mission three, practicing financial literacy. Now,

make no mistake, I know a lot of these topics are a little heavy for a wee little one. You probably don't want to talk to a six-year-old about compounding interest, but you can teach them more bite-sized financial concepts like the value of the dollar or the value of practicing charity. If you want to teach the kiddos the importance of charity, start by giving them a little bit of money that they can use to donate to the charity of their choosing. Then plan a date when you take them to the headquarters of that charity to see up close the impact of their donation. For kids, the hardest part about conceptualizing charity is that they don't see where their money is going. They have it, they give it away, then it's gonzo, full stop.

But if you show them where that money is going and how have it. They give it away. Then it's gonzo. Full stop. But if you show them where that money is going and how it makes a difference, the importance of giving back is more likely to stick. For today's tip, you can take straight to the bank. Take some tips to the bank. That's Treasury Inflation Protected Securities. money rehab is a production of iheart media i'm your host nicole lappen our producers are morgan lavoie and katherine law money rehab is edited and engineered by brandon dickert with help from josh fisher executive producers are mangas hadikadur and will pearson huge thanks to the og money rehab supervising producer, Michelle Lanz, for her pre-production and development work.

And as always, thanks to you for finally investing in yourself so that you can get it together and get it all. you spend my money money