Thursday, July 31, 2008

If Ava can't count dollars, it don't make sense

Somehow my daughter had more cash on hand than I did last week. $366. That's how much I found in her personalized piggy bank. I wanted to keep her occupied by hanging with J. and listening to the coins dropping into the bank and couldn't figure out why they weren't making noise.

It turns out J. has been stuffing all her monetary gifts in there, along with periodic loose dollars in his pockets at the end of the week. Cha-ching! So she has her own little savings account now at the credit union.
She enjoyed waving the bills around more than fiddling with the coins, smart investor-in-training that she is. I'm hoping I can teach her to say "miracle of compounding" before she's two.

There's a nifty compounding calculator here that shows if we add just $25/month to her account over the next 18 years and get an 8% average annual yield compounded monthly she'll have more than $13,000 when she gets ready to go off to college!

Clearly, with college tuition costs already in the stratosphere, we'll need to make additional investments for her too, but her little account could help cover the cost of books and incidentals for a couple years, or serve as a down payment on a little condo if she goes to a school where lots of students live off campus. With a couple roommates, she could easily cover the mortgage and finish school with a degree and an appreciating asset, which is still the foundation of wealth building for most families, current housing industry meltdown notwithstanding.

Black Enterprise magazine has a great initiative they've undertaken to help more families of color build generational wealth called the Declaration of Financial Empowerment. As their site explains, the program "seeks to empower you by changing your attitude toward money management and revealing comprehensive savings, investment and consumer strategies."

In the fascinating book "The Hidden Cost of Being African American: How Wealth Perpetuates Inequality," (PBS review here) author Thomas Shapiro argues that disparities of wealth partly explain "the higher risks of poverty, joblessness and incarceration" in communities of color.

In particular, the relative lack of intergenerational wealth (assets that parents or other family members hand down to their kids to build upon for the next generation) hurts communities of color while helping other communities to lift succeeding generations economically and socially beyond their own achievements. The simple act of being able to graduate from college debt free is a huge leg up for anyone. With no debt, you can take jobs or opportunities that may not pay much (or anything) up front, but provide valuable contacts, insight, and experience. For students with huge loans to pay back, this option is often just not possible. It also means that students from families with intergenerational assets (such as parents who can pay some or all of a student's college tuition) don't begin post-graduate life in the hole financially, which the book points out has its own compounded benefits that grow over time.

We're hoping to both provide a leg up for Ava and teach her to be a good steward of her (and our!) money. The book lays out the academic research for why this matters. But we can look around our own community and see it in action.

Building financial literacy in my child: another important task on my parental duty list.

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