2008-12-18

2 Ways to Put Your Children's Money to Work

2 Ways to Put Your Children's Money to Work

Recently I've been sharing tax strategies related to getting your children in the game and on your payroll. Now that you've put your children to work, the next step is to put their money to work!

There are many ways your children can put their money to work. Here are two of those ways:

#1 Have Your Children Pay for Their Extras

One thing most parents agree on is that children can be expensive! All the extras add up - sports, lessons, toys, games, the latest gadgets. All parents know this list can go on and on. Rather than paying for your children's extras with your after-tax dollars, have your children pay for their extras with their after-tax dollars. Your children's after-tax dollars are much cheaper than yours - especially if they are in a 0% tax rate!

What I love about this strategy is it reduces my taxes AND gives my children real life experience with managing their own finances.

#2 Have Your Children Fund a Roth IRA

Typically children do not have IRAs because in order to make a contribution to an IRA, the IRA owner must have earned income. Since most children do not have earned income, an IRA is not an option.

When you have your business hire your children, not only do you have the opportunity to reduce your taxes, but you have also created the opportunity for your children to contribute to an IRA. Once your children have earned income, they are eligible to contribute to an IRA.

In most cases, I find that a Roth IRA is a better fit for children than a traditional IRA. One reason is because distributions from a Roth IRA are tax-free. In a traditional IRA, distributions are taxable income. This means that all the income earned in a Roth IRA will never be taxed! Of course, the rules of the Roth IRA must be followed to receive this treatment but I find that most of the time, the rules of the Roth IRA are easier to follow than those of a traditional IRA.

The power of time is huge in this strategy because even modest contributions to a Roth IRA at a young age can grow to a substantial balance by the time your children are even just middle aged! Add to that the tax-free nature of the Roth IRA and it's easy to understand why this strategy can be so powerful for your children.

Another reason I like the Roth IRA for children is that there are several exceptions to the early withdrawal penalty (which can make Roth IRA earnings and contributions taxable). These exceptions provide opportunity for your children to take distributions without penalty long before they reach retirement age.

2008-12-15

2 Necessary Conditions For Portfolio Diversification - Warren Buffet Approach

2 Necessary Conditions For Portfolio Diversification - Warren Buffet Approach


I bet you must have been told at one time or another not to put all your eggs in one basket before right? No doubt diversification is a must but how many stocks you should buy and how much money you should be investing in each stock is depends on these 3 necessary conditions for portfolio diversification.

In return, you'll be having the best asset allocation strategy that will effectively utilize all of your hard earned money now and forever.

How Knowledgeable Are You

To make the most money from stock market, invest in what you know the most. You must know the company inside out. At least, you must understand its business model, which industry the company belongs to and how the profit was generated. Also, don't forget to spend enough time to understand the nature of its business, effectiveness of its management as well as the unique selling proposition of its products or services compared to its competitors.

From there you can decide if the company is a great investment opportunity indeed.

But the main problem that most novice investors have is they don't know where to start. They just don't have idea which stock they know the most. Unlike Warren Buffet who has been taught about stock investing since he was 11 years old, most of us need to start from bottom. You can either start with something you know from your hobby (e.g. computer or software geeks), whatever you have learnt from your office or anything that you are interested in.

Thus, making yourself familiar with the industry results should be one of the top necessary conditions for portfolio diversification. It gives you better understanding of how well the company has been doing so far. And most importantly, what will be its future in years to come. If you are confident with the stocks future profits and cash flow, it becomes less risky for your money to grow.

How Much Money You Have

Obviously, the more money you have the better. Unfortunately, not many of us have the same fund as Warren Buffet does, unless you have inherited millions of dollars from your wealthy parents. Even if you do, the money is still not enough. I'll let you know why.

What makes Warren Buffet's investment so different than many of us is that, once he discovered great stocks offered at discounted price, he will buy not only millions but billions of dollars. His stock purchase alone is sufficient to make the stock prices moves significantly that time.

With that kind of investment, he has enough votes to influence the company's direction. For example, his holding company, Berkshire Hathaway, owns more than 15 per cent of all the outstanding shares of Coca Cola. As the matter of fact, he has been sitting on the company's board for at least 17 years.

You tell me who else have the luxury of sitting in the board of management.

Therefore, just because concentric diversification has worked well for Warren Buffet, it is not necessarily worked well for you; unless you have billions of dollars investing in such companies though. Therefore, as much as possible, allocate huge (if not most) of your asset into something that you have the most control. This can either be your real properties investment or starting up your own businesses.