Q: My wife (50) and I (54) would like to help build future wealth for our two daughters, now 17 and 20. Among the options we’re considering are either a whole or universal life policy on ourselves. Currently, we each have a 30-year ($500,000) term life insurance policy on ourselves we purchased back in 1999. Another option is mutual funds for them, starting each fund with at least $1,000 and then contributing $100 to $200 monthly. At some point, we would move the funds to them, so they’d be contributing. Please help me with your thoughts and ideas.
A: The approach I would recommend focuses more on financial literacy and less on wealth creation.
Financial literacy matters. We’re increasingly responsible for making our own decisions when it comes to managing money. The signal event is the rise of the 401(k) and similar retirement savings plans. Colleges and universities also require parents and students to come up with more tuition dollars on their own, usually borrowed money. Another critical reason why financial literacy counts is the “democratization of credit.” Credit once limited to the wealthy is routinely offered throughout society. The modern credit economy comes with a steep price tag, since lenders typically hide the true cost of borrowing money.
I think setting up mutual funds for your daughters would encourage a greater understanding of money and markets. I would involve them in the decision and work with them to pick funds and research the trade-offs between actively managed and passively run funds. You could run the numbers to see the impact fees have on returns. If they are working, they could contribute. They’ll learn about the power of compound interest and the swings in the business cycle.
In addition, you might want to open up a low-cost online brokerage account for them. Investing in individual stocks and other securities unveils a different way of looking at the world.
Indeed, both the mutual fund and brokerage accounts are something of a “head fake.” The term comes from a famous “last lecture” by Randy Pausch, the late Carnegie Mellon computer scientist. A head fake is when it seems we’re learning one thing yet we’re actually gaining a different — and far more important — type of knowledge. In this case, it seems to be about creating wealth, but it’s really about learning personal finance.
Chris Farrell is senior economics contributor, Marketplace, and economics commentator, Minnesota Public Radio.