My son is in the military.  He has struggled with academics most of his life, achieving high marks in some schools and reaching certain goals and struggling with others.  The military has been very good for him, and he is a great young man.  After a few years fighting for our country, he became an officer.

My wife and I traveled 600 miles to see him be presented with his stripes.  After the ceremony, fly-over and reception, we went to lunch at a famous local establishment.  There he proceeded to tell me the good news.  After struggling for five years to make ends meet, his pay would almost triple.  What?  Yes, he would be making almost three times what he had been making earlier that day.

I congratulated him again.  His mother teared-up, and I brought the conversation back down to a very serious tone.  “Son, I have been wanting to tell you the Secret of Life for several years and now I have the opportunity. You are about to be faced with an incredible desire for your spending to catch-up to your earnings.  It will be SOOOO easy for you to once again spend, invest, blow, etc all of your income.  As soon as you return to the base you should create a budget out of your existing expenditures and add, say 15% so you can enjoy the fruits of your great accomplishments.”

There was not a pause.  There was not a reflection. There was not an immediate acceptance of the value of this advice.  What returned is, “You don’t understand.  There is NO WAY I can live on what I HAD BEEN making! I was living a dirt poor existence.”

Then I reflected … did I approach him too fast?  Should I have approached him differently?  Our relationship is like that of many parents of young teens and adults.  They cannot be easily taught, but once they learn the facts the old fashioned way, through hard knocks, they realize how smart their parents are.  We have had the “rebound conversation” several times on other issues, so I know one day we will revisit the Secret of Life discussion.

Our connection remains strong and positive.  If he “gets-it” soon, his practice of increasing his savings at a young age could have a substantial effect on his retirement date, retirement status and his quality of life in his senior years.  Your paycheck may not ever triple, but the formula should be the same.  Whenever you receive a windfall, whether a one time payment or a salary increase, save most of it. Pull a token $100 and enjoy a good meal and a cheap bottle of wine.  Draw down $100 and go on a day-trip to a surrounding city and see some sights you have been putting off, but return to normal life and save the rest.  You will be amazed at how fast it will grow through compounding.

There are a few “Freebies” that the US Government provides for investors.  This may also change in the next few years as the government looks for ways to pay for entitlement programs, the Stimulus Plans of 2009 and 2010 and President Oboma’s healthcare plan.  None of the items above have been paid for, and we are working off of borrowed money.

The most valuable way to save for your child’s college, wedding or emergency is through a plan called the Uniform Gifts to Minors Act account (U.G.T.M.A.) The program is simple.  The child pays taxes on the passive income that the account accumulates at the child’s tax rate.  REPEAT:  Passive income, such as interest and dividends, is taxed at the CHILD’S TAX RATE.  This should be 0% unless you have contributed an obnoxious sum of money into the account.

So, here is the plan:

1. Take baby home.
2. Locate food, diapers, etc.
3. Love and care for baby.
4. Open a Uniform Gifts to Minor’s Account for your precious one.

We did this for our three children before they were in elementary school.  It provided a tremendous savings account by simply making a number of small monthly contributions.  There are many instruments that can be used, including savings accounts, mutual funds, bonds and common stocks.

We chose to buy stock through a Dividend Re-Investment Plan (DRIP) for each child.  Our first child accumulated McDonald’s stock.  The second one, Dow Chemical, and the third one, Johnson Controls.  They were initially purchased through the National Association of Investment Clubs (NAIC) Dividend Reinvestment Plan.  This plan was made available to individual investors and is now called the Better Investing Community.

Compounding and reinvesting is a phenomenal principle.  Although all the of our selections did well, McDonald’s and Johnson Controls “hit it out of the park.”  As always, don’t make investing a monthly decision.  Decide one time to invest automatically through a bank draft or automatic process.  Set it and forget it … just like Ron Popeil’s Showtime Rotisserie.

Start early.  Start small.  Reinvest dividends and earnings. Watch it grow tax free, in most cases.  remember UGTMA accounts are taxed at the child’s tax rate.   After you see the value of appreciation, you will WANT TO make the monthly contributions larger, and you will.  Good Luck from your InvestmentBuddy.

If you have several children it will cost several times the cost of a new home to put those little ones through school. What is a family to do? There is actually plenty you can do to prepare for this expense.

1st -  START EARLY

The rules of compounding cannot be overlooked.  Begin the practice of saving for your child’s education as a regular discipline in your family’s financial plan.  Sacrifices in the early years of the child’s life will take much more investing later in life to equal the same impact.

2nd – REVIEW YOUR APPETITE FOR RISK

This part may sound counter-intuitive, but the InvestmentBuddy suggests investing in aggressive growth investments in the early years of the child’s investment years.  From birth to 13 years old, you should invest in individual stocks or mutual funds that are in growth areas such as high-tech and biomedical companies.  There may also be stocks that are still beaten-down from the recent downturn in the market.  Review our report  on Zombie Stocks.

3rd – MAKE REGULAR CONTRIBUTIONS

This is the “secret sauce” to most large family fortunes.  Establish a regular college savings in the name of the child.  You may begin with a brokerage account or a Dividend Reinvestment Plan (DRIP) in the child’s name.  It can be established as a Uniform Gift To Minors Act Account (UGTMA).  Under this type of account, income that is generated through dividends and interest income is taxed at the child’s rate.  Unless the account is very large, there will be no tax liability.

4th – MAKE IT FUN

It is unlikely your 5 year old son or grand-son will care about the appreciation in Apple Corporation’s (AAPL) stock.  A 15 year old, however may like seeing his or her portfolio grow.  It is also a great way to model your savings trends in real time.  Let them see how investments are paid as a priority, like church donations, life insurance and car payments, even in months when money is tight.

5th – REVIEW YOUR STATE’S EDUCATIONAL SAVINGS INCENTIVES

Some states offer incentives to allow parents and grandparents to pay future tuition at current prices, by prepaying.  Check your local university resources.

6th – SHOP COLLEGE LIKE IT IS THE MAJOR PURCHASE IT IS

InvestmentBuddy.com helps people prepare for the big expenses.  This IS THE BIG ONE.  Shop colleges as you should.  Look at educational opportunities in other states.  Consider out of state tuition.  Seek scholarships.  If you have to borrow some of the money, shop several loan opportunities.  Don’t stop at the first choice.  [At the time of this post, congress is considering taking over SLM Corp (Sally Mae).  If major changes pass, we will attempt to post any significant changes here.]

As a general rule, things that are affected by inflation for several years usually fall.  Our latest example is the US housing market.  Keep your eyes on the college costs.  Look for opportunities.  In our market, for example, a local university is offering FREE tuition to post-9/11 military servicemen.  Keep your eyes wide open and let InvestmentBuddy know of specials that would be helpful to other readers.

Many employees participate in this type of plan through their employer.  They can usual either deposit into a standard savings plan or into a company sponsored 401k plan.  There are many advantages of the 401k which we will discuss later.

An automatic plan takes the decision (to save or not to save) out of your hands when you could become reluctant to save.  If you could elect each week, “Should I save for my retirement, or should I take my wife out to that fine, five-star steakhouse.  She deserves it.”  This automatic plan should be part of the budget process.  You keep enough cash available on-hand to make your savings plan secure.  For example, if you are tempted to raid your savings every 3 or 4 months, there is a problem.  Either the scheduled deposit is unrealistic, or you are not disciplined enough to maintain it.   Either way, you must make an adjustment.  Make the value that you plan to deposit realistic and workable. You’ll be surprised at how fast it will accumulate.

We all know people that do not have a savings plan.  When they land a windfall, they spend it as soon as possible.   Examples of windfalls would include tax rebates or the sale of a private residence.  Next week we will discuss the growth potential of regular savings.  Did you say you want to be a millionaire?  You definitely can be.