AOA 085: A Roadmap for Your Child’s Investing Journey — With Laura Adams

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“Money is a tool for happiness. I think a lot of people don’t really see money as a tool. They see it sort of as the end, like, ‘I’m just supposed to accumulate as much money as possible.’ Using it for happiness, that’s the whole purpose.”

— Laura Adams

In this episode of The Art of Allowance Podcast, host John Lanza and personal finance expert Laura Adams discuss how to introduce investing to children in a way that fosters agency rather than anxiety. They explore various investment vehicles, such as 529 plans, IRAs, custodial accounts and the new Trump Accounts, emphasizing the importance of understanding the goals behind investing for kids. Their conversation also covers strategies for engaging young investors, the significance of starting early and common mistakes made by young adults in their financial journeys. Laura also shares insights on how parents can instill good investing habits in their children and the role of financial institutions in promoting financial literacy.

Laura Adams is a money expert, an award-winning author and the host of the top-rated Money Girl Podcast, with more than 40 million downloads. Her mission is simple: to make complex financial topics easy to understand so people can make wise choices and live richer lives.

Laura has completed over 3,000 interviews with top national outlets, including ABC World News, CBS, FOX, NBC News and NPR. In print and online, her practical advice has been featured in The New York Times, The Wall Street Journal, The Washington Post, Consumer Reports and Forbes.

A recipient of an MBA from the University of Florida, Laura lives in Vero Beach with her husband.

Visit our YouTube channel for selected snippets from this and other podcast episodes.

Links (From the Show)

Show Notes (Find what’s most interesting to you!)

  • Laura’s money-smart journey [1:14]
  • What parents are really trying to accomplish when investing for kids [3:24]
  • Common investing mistakes parents make [4:42]
  • Helping kids understand the difference between a stock and an index fund [5:56]
  • Investing timeframes and strategies [7:31]
  • Exploring 529 accounts [10:50]
  • The flexibility of 529 plans [14:40]
  • Rolling a 529 into an IRA [15:59]
  • Traditional versus Roth IRAs explained [17:39]
  • How custodial accounts facilitate investing on behalf of kids [20:01]
  • Are Roth IRAs custodial accounts? [23:29]
  • Laura’s thoughts on youth investment platforms [24:29]
  • The truth about Trump Accounts [26:09]
  • Which account—529 or Trump—is better for education purposes? [29:05]
  • Potential disadvantages of Trump Accounts [30:02]
  • PSA: Avoid the “money sitting in cash” investing mistake! [31:44]
  • Understanding pre- and post-tax contributions [33:14]
  • Investing basics for younger kids [36:10]
  • The appeal of investing simulation [37:47]
  • A Roth IRA revisit [40:05]
  • Helping teens understand the difference between long- and short-term investing [41:18]
  • Common investing mistakes young adults make [44:24]
  • Retirement options for self-employed individuals [46:57]
  • Financial separation between kids and parents [49:47]
  • The importance of starting early in investing [52:06]
  • How financial institutions can help families understand investing better [53:43]
  • The credit union opportunity [55:14]
  • Laura’s evolving thoughts on real estate investing [56:17]
  • Laura tackles the “Fast and Fun Round”! [57:57]
  • Connecting with Laura online [1:00:58]

Click here for the full transcript.

If you liked this episode …

Interested in starting the investment conversation with your kids? Expert investor and two-time podcast guest Evan Wilson explains how a McDonald’s drive-thru can help. Listen to his most recent episode at 12:40, or watch this video short. Evan’s hockey-stick approach to compound interest at 31:18 can also help kids “grasp”—pun intended—this concept.

Thinking about opening a Roth IRA for your teen? Author and CFA Gene Natali discusses how this vehicle can help older kids create their own retirement income to replace defined benefit programs (like pensions) and establish emergency funds. Tune in at the 28:26 mark, or stream this clip from his episode.

Wanting more thoughts on real estate investing? The “Godfather of Financial Independence,” JL Collins, believes that homeownership is misunderstood as an investment. He also shares his opinions on house hacking and investment properties during his podcast appearance. Dive in at 56:27 for these hot takes.

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Full Transcript

This transcript is from The Art of Allowance Podcast, Episode 85, featuring host John Lanza and guest Laura Adams.

John Lanza (00:00)
Hello and welcome to The Art of Allowance Podcast. I’m your host, John Lanza.

So one open question in our work is how do we introduce investing to our kids in a way that kind of builds agency rather than anxiety? At what age, through what vehicle, and how do we move from parental control to kid as empowered investor over time? I decided to invite Laura Adams because as the Money Girl, she is one of the clearest explainers of financial stuff that I know.

Adams is a personal finance expert and host of the top rated Money Girl Podcast with more than 40 million downloads. She’s been named one of Empower’s Top 50 women in Personal Finance and her mission is simple, to make complex financial topics easy to understand so people can make wise choices and live a richer life.

Welcome, Laura.

Laura Adams (01:00)
Hey everybody, John, thank you so much. I appreciate the nice intro. It’s really great to be here and chat with you about money, one of our favorite topics.

John Lanza (01:10)
We are more than fortunate to have you joining us and why don’t you just tell us a little bit more about yourself and perhaps why you started the Money Girl Podcast on which I was very fortunate to be a guest.

Laura Adams (01:21)
Yeah, you know, I got my MBA a long time ago. And at that point, what I realized is there were a lot of very educated people in my class who had done very well in their career with their education. They had multiple master’s degrees and they were C level, you know, in their companies, but they were really struggling with their personal finances. And a little light bulb went off in my head that made me realize you can be very smart but not know what to do with money. And so I had been a kid who was always begging mom and dad for a checking account and like I wanted to manage my own money. I kind of realized not everybody’s like that. Not everybody really takes an interest in it. And I thought, well, maybe I can help make this topic a little bit more digestible. And so I kind of switched from corporate finance over to the personal side. And then when, you after I got my degree, that’s when I started podcasting. And so the Money Girl Podcast was sort of born out of this desire to give back to the podcast community. I had been listening to podcasts ever since like 2005. I was a pretty early adopter. And I just thought, you know, what can I do? What can I give back to the podcast community since I’m taking in and listening to so many of them? I thought, well, let’s just see what happens with this personal finance podcast. And I just got great feedback. That show led to other relationships with book publishers that allowed me to write books and that allowed me to do other things like speaking and work with brands in the media and just gave me a lot of other opportunities. So that’s how it all started.

John Lanza (03:10)
Yeah, you’ve done very well and it’s very impressive. And I want you to talk to us a little bit about helping us, helping us, parents really understand kind of money and investing is where we’re going to focus. And so when parents say, I want to invest for my child, what are they really trying to accomplish? I you’ve talked to a lot of people about this.

Laura Adams (03:33)
Yeah, you know, I think for most people certainly education is on their mind. You know, they are thinking about the ever growing cost of college and education and thinking, can I afford this? Maybe I want to help give my kids a leg up by getting them to save and invest early. Maybe it’s just they want to try to educate kids about the process of saving and investing. So I think it means a lot of different things to people, but for most parents that I talk to, they’re really worried about paying for education. And can I do that while I save for my own needs, my own savings and retirement needs? And, you in a lot of cases, we have to have a serious conversation about, you know, how to prioritize that. But yes, so it really does come down to what is that? What is the goal for that money? Once you determine the goal, then you can focus in on, am I saving or am I investing? And what type of account should I be using as the vehicle to get me to that goal?

John Lanza (04:36)
Yeah, and we’re gonna get to specific accounts in our discussion, but where do parents tend to go wrong when it comes to investing, when they’re thinking about how to invest for their kids?

Laura Adams (04:51)
Yeah, you one thing that I see parents do is trying to teach kids to be stock pickers. Like, you like Disney? Well, let’s invest in Disney stock, you know? And maybe that’s a good exercise if you’re really just trying to have a little fun and maybe teaching kids some basics. But I don’t like the idea of parents trying to encourage kids to pick stocks. We know that can be a losing proposition. It can do very well, but it can also do quite poorly. You know, a broader kind of diversified portfolio is where we always want to encourage parents to be investing. So I’d like for them to also encourage kids to have that same diversified mindset.

John Lanza (05:35)
Let’s go a little bit deeper there because that’s exactly what I did with my kid because they were interested in investing and the problem with the index funds, which is what we’re invested in, you know, with total stock market index funds. That makes sense, but it’s boring for a kid, right? And yeah, and I totally understand. That is not, we don’t want them to equate excitement with stock picking, but when they first show that interest …

Laura Adams (05:51)
It is. It is boring.

John Lanza (06:04)
Do you have any thoughts on how we go about this in a way that is going to be beneficial to them, I guess?

Laura Adams (06:14)
Yeah, yeah, and I think it is helpful to make kids understand what is the difference between a stock and an index fund and to your point, one of the best ways to do that is to really get deep into it and to show them, hey, these are individual companies that actually exist in the world. They’re profitable and therefore you can share in that profitability. So yeah, I’m not totally against it, but I think in terms of like, if we’re gonna set up some regular contributions for kids, I would love to see them sort of dollar cost averaging into a broader index. But yes, I mean, if a kid is just in love with, I don’t know, LEGOs or whatever it is that they can invest in, I do think, I mean, I don’t think there’s anything wrong with trying to help them understand just the concept of companies and stocks. And yeah, if that’s what will get them hooked in in the beginning, fantastic. I just wouldn’t want to see them put all of their money kind of placing that bet, let’s say, on that one particular company if we’re talking about larger amounts.

John Lanza (07:23)
That makes sense. And I think it is a big challenge for parents. And I appreciate that information. I think that’s helpful. If you’re going to map out how a parent should think about investing for their children, we talked a little bit about it, but how might that look?

Laura Adams (07:39)
Yeah, so stepping back and thinking about when am going to need to use this money? You know, are we talking about investing for an infant and we’ve got 18 years before we’re going to need to spend this money perhaps for education? Or, you know, is the kid already a teen? Maybe we’re thinking about buying a car in a couple years for them, or maybe just trying to set them up so that when they’re finished with high school or college, they’ve got a little bit of a leg up in the world.

So the first rule is thinking about what’s my timeframe? What’s my horizon for this money? And if it’s short term, we always wanna be saving and not investing. Saving is gonna keep that money much more safe, much more liquid, obviously and secure. So, you know, when the kid is ready to buy the car, let’s say, that money is there. There is no risk that the account will be worth less in a few years than it is today. Now, it’s not gonna earn much interest, right? You know, we are seeing some high yield savings accounts right now, maybe at, 4% if you’re doing well, but we know most traditional savings accounts are earning much less than that. So the expectation there can’t be that it’s gonna grow a ton, but it is gonna keep the funds safe.

If we’re talking about a much longer time period, like, okay, we have an infant and we’re looking for education in 17, 18 years, that’s a great time period to be investing, really hoping that this money is going to give you a higher return. You know, most indexes, if you look at the S&P 500, that index has shown pretty consistently that over time, you can get after taxes, even after inflation, like a 7% return. So it’s not a guarantee that you’re gonna get that 7%. Some years are gonna be better, some years are gonna be worse. But on average, you can think about earning much more than you could with a high yield savings account. So the longer the time period, the better you’re going to be investing versus savings. And if we’re talking about like really long term, like a child’s retirement, you know, then we want to be looking at accounts that have maybe some tax advantages over the long term that are really going to help that money grow over, you know, maybe three, four or five decades, depending on the child’s age. So step one is really figuring out when do you need to spend this money? And if you’re not sure, you really could just begin saving. You could even begin investing in, let’s just say, a taxable brokerage account if you just kind of want to bucket, you know, to put some money until you’re really sure, is this for education or, you know, is this for something a little bit more short term? But that’s the first challenge, I think, for anybody when we’re talking about how to manage money is figuring out what the purpose of that money is.

John Lanza (10:50)
Alright, let’s get specific on these 529s. We’ve touched on them a little bit. But can you give us a quick kind of quick map of how how the 529s work, what they’re all about, and maybe something that people misunderstand about them? Because we hear about them all the time. They’re very powerful, but give us the lay of the land, Laura.

Laura Adams (11:08)
Yeah. Yeah, so 529s are exclusively for education. So they are designed to help parents save for kids. And the beneficiary of the account is going to be that future student. And you are able to make contributions. What we love about them is that there really is no, there are no limits. So there’s no income limit, there’s no contribution limit. There may be some lifetime limits for some of them, quite high. Some of them may allow you to put 500,000, 600,000 in these accounts, you know, over a lifetime. So they’re quite flexible in that regard. However, they’re not flexible in what you need to use them for, which is education. And fortunately, the definition of these, the use of these accounts has really broadened in the past years. And I love seeing that because not only are they for college, but now you can also use them for a child’s private school, like high school, middle school, elementary school, any lower education needs. It could be public school, it could be private school, it could be a religious school. So that education expense and any things like computers.

Maybe you’ve got to buy some supplies, things that the child has to have for going to school. You can also use the 529 funds for that. So that’s great. There is a limit, however, an annual limit for the lower education. So it’s up to 10,000 per year per student. So it’s not an unlimited expense, but it is something which is great. So that can help parents manage the cost of education.

Also, things like if a child wants to go to a vocational school, maybe they don’t want to go to college, maybe they want to get some type of certification. Maybe it could be becoming an insurance agent or going to cosmetology school or going to any kind of a trade school. Those funds are now eligible for those costs. So this is something new. We’re just seeing a broadening of the ways to spend these funds. And that’s important because if you over save in these accounts, you could be subject to a penalty if you pull them out and you’re not spending them on education. There would be a 10% penalty if you don’t spend those funds on education.

Now, if you have other kids, you can actually change the beneficiary or even roll the funds over into a different 529. So you can kind of give them to a different child. It could even be to somebody else in your family. It doesn’t necessarily even have to be your child. It could be a niece or a nephew. You can kind of give them away if that’s something that you’re interested in. But for most parents, the goal is to save enough in these accounts, but not to over save to the point where you could be subject to a penalty. Contributions can be made anytime. So you could make them once a year, you know, at the end of the year, or you could say, I’m going to put a little bit in, I’m going to put, you know, 50 bucks in a month or 50 a week, whatever schedule makes sense for you.

So another key, you asked about what people misunderstand. I think a lot of people just think there’s one 529 plan. The thing about these these accounts is that most states have more than one 529 plan and they’re available to not only the residents of those states but to other residents so you can choose an in-state 529 or you can choose a different state’s 529 so you want to shop carefully.

Let’s say your state gives you a tax benefit for putting money in your state plan. Well, that could be a really good reason to use your in-state 529. But maybe, you you’re seeing better benefits with another state. And it has nothing to do where the child goes to college. You could have a Florida 529 and send a kid to school in California. Even in Europe, there are some schools that are going to be accepting of 529 plans. Basically, if they accept financial aid, in most cases, that means that you’re eligible to pay for the tuition at that school using 529 funds. So a lot of flexibility there, but you do have to shop and compare and make sure that the plan you select is right for you.

John Lanza (15:59)
Is there anything you can do with the account? Say your kid you’ve saved and your kid was frugal enough that they went to, or you happen to save enough and they went to a state school and you have a balance in the account. Is there anything you can do with that money aside from transfer to another kid once the kid is finished with their education, aside from keeping it for say a master’s degree or a Ph.D.?

Laura Adams (16:24)
Yeah, you know, if you’re fortunate enough not to have to spend all of it, there is a new rule that allows you to roll money from the 529 into an account, an IRA for the child. So the child has to be earning money, number one, to qualify for the IRA.

John Lanza (16:31)
You

Laura Adams (16:48)
And you have to adhere to annual contribution limits, which is right now it’s 7,500 a year. So you would have to kind of roll it over in chunks, like up to the amount if the child has that amount of income. But yes, that is also a relatively new rule that can save you if you’re saying, well, you know, either I’m gonna have this 10% penalty or maybe we just hold on to it and we know that the child is eventually going to start earning income, they’re going to have the opportunity to open an IRA and we can just start rolling that money over for them and that’s a great head start for the child.

John Lanza (17:29)
Okay, and I told myself that we wanted to be, make sure there was nothing intimidating about this. So I know almost everybody knows what an IRA is, but why don’t you tell us what an IRA is. Let’s start there.

Laura Adams (17:35)
Yeah. Yeah, so IRA individual retirement account. These are fantastic because they are available to anyone with earned income. So basically, if you’ve got wages, you’ve got tips, commission, any type of earned income, it doesn’t count for, let’s say investment income that you might be getting, interest and dividends. But if you’re working and it can be at any age and so in a lot of cases, teens are starting to earn income, maybe they’ve got a summer job or something they’re doing on the weekends. That earned income qualifies them for an IRA and it could be a traditional or Roth.

I love young people to use Roth IRAs because they can put money in on an after-tax basis and then all the growth in the account can be withdrawn entirely tax free later on. So it’s really smart for young people to use Roth accounts, because they’ve got so much time ahead of them in their life to let that account grow and grow and grow. And then boom, once you take that money out in retirement, you get to have it tax free. So it’s a really wonderful account. So that’s the type of account I would love to see the young person using once they’ve got their own income. And again, it could be a thousand, if they earn a thousand dollars, well, they could put a thousand dollars in the Roth account or the parent could put the thousand dollars in the Roth account on behalf of the child.

I have a lot of people who ask, well, I want to open an IRA for my newborn. Unless the newborn is like a TV star, you know, there’s some kind of famous newborn earning a lot of income, they’re not going to be eligible for a Roth IRA until they’re actually legitimately working. And you can’t just say, oh, well, I’m going to let little Susie clean the house and that’s going to be her job unless you’ve got the documents to back that up, unless you really are employing the child in a family business and you’ve got all the paperwork to back that up. You can’t just say, oh yeah, they’re earning income and you do have to back it up for the IRS.

John Lanza (19:56)
That makes sense. I think because it’s going to come up and it should be helpful when you’re opening an account, say your 15 year old is earning money and opening an account. Does that need to be a custodial account? What is a custodial account? And maybe also talk about investing. If you want your child to invest in their own account at age 15, what needs to be done? Like I actually had when my daughter was interested and I made the kind of somewhat the mistake, although we used it as a learning process when she made that investment, but I had her just invest in my brokerage account. So I didn’t set up any. So give us a lay of the land there, Laura.

Laura Adams (20:30)
Mm-hmm. Yeah, so in terms of the IRA or in terms of custodial accounts. Okay.

John Lanza (20:39)
Custodial account well custodial accounts and how they relate to IRAs as well.

Laura Adams (20:43)
Yeah, so custodial accounts are very different because they’re not a tax advantaged account like an IRA. But these accounts allow parents to invest and save for a child on the child’s behalf. Basically, minors can’t own these financial accounts because in most cases, banks and investment firms are gonna say, nope, you gotta be 18 to have this account in your name. So the custodial account allows a parent to invest for a child, it is in the child’s name, and then automatically when the child becomes 18 or 21, whatever the age of majority is in the state where you live, those funds will automatically be owned by the child. Now there’s some pros to that and some cons to that. But these accounts they’re UGMA or UTMA the uniform gift to minors act is UGMA the uniform transfers to minor act is UTMA and they’re a little different in the types of investments that that you can hold and one of them you can actually buy real estate for the child but you know, basically you can go to a brokerage, you can open this account, they will give you a, you know, just a menu of investments that you can choose, but you can get very fancy with these if you wanted to invest in, you know, something more, let’s say not mainstream, you can, but I think for most parents, they’re really just looking for a way to, you know, to start putting money away. And the pro is that, you know, it’s a great way to invest.

The con is that the child is going to own those funds once they turn 18. Not all parents want that. Some want to have a little bit more control over that. So maybe the child goes to college, they want to control how the money is spent using the 529 plan funds, let’s say, because those are owned by the parent. Also, the funds in a custodial account, because they are owned by the child technically, they will count toward financial aid differently. They’re going to count those funds against you more than if they were in the parent’s name. So you need to think about that if financial aid is something that you want to maximize. Do a little research there and the type of account that’s going to help best.

John Lanza (23:18)
Yeah, that’s a very good point on the financial aid.

Well, excellent. That is very helpful, Laura. That gives us a good sense of all these accounts. And let’s talk a little bit about these new Trump accounts, these that are getting a lot of press right now. So we’ve covered the 529s. We talked a little bit about the IRAs and the Roth IRA. And I think everybody should feel fairly comfortable about that. Now one question I want to ask. So a 15 year old who opens a Roth IRA, is that a custodial account or not a custodial account?

Laura Adams (23:50)
Yeah, it is actually going to be in the parent’s name. Technically it will be held in the parent’s name for the child because again, the firm is typically not going to want a minor to have the account in their name. We see banks occasionally offering youth accounts or youth brokerages here and there for kids like 13 to 17, but in most cases, a real IRA is gonna need to be in the parent’s name on behalf of the child.

John Lanza (24:25)
Sure. That makes sense. And you know, now that you brought it up, I’m curious if you have any quick thoughts on the idea of the kind of Greenlights and the Stockpiles of the world. And I don’t know if Robinhood does this as well, but offering that ability to invest in individual stocks and mutual funds on those platforms. Have any thoughts and ways for parents to think about the pros and the cons of those? Because those kinds of things are growing, whether it’s the Greenlights or the Currents of the world or the GoHenrys or whatever kind of card or platform it is. Tell us a little bit about your thoughts on that and investing.

Laura Adams (25:03)
Yeah. Yeah, I love them. I think they’re a great tool, not only for actually managing money, but education. A lot of them have a lot of financial literacy education kind of built into these apps. So yeah, if kids are enjoying apps and they’re technical, I mean, it could be a really great way to get them involved. Now, parents can put controls on these too. So, you be aware that you can sort of give it certain information like, you know, the child is not allowed to use it to shop online, or we can even set up things like allowances, you know, using these tools as well. So there’s a lot of, they have a lot of interesting features, I think, and just if parents can participate in that and fully use these, I think kids are going to get the most out of them.

John Lanza (26:02)
Great, that’s very helpful and very helpful to mention the parent controls, because that’s true. We’ve used a few of those cards as well. Okay, so let’s get back to these Trump accounts. What’s their official name and then what are they most similar to and who are they really for? Tell us all about this new program that’s being on, I mean, it’s official, but it doesn’t, you can’t start investing, I think until July, correct?

Laura Adams (26:28)
That’s right. Yeah, you can actually apply for one when you file your taxes this year. So it is kind of strange the way they’re rolling it out because yeah, they’re not they don’t formally exist yet, but they will this summer. I think July 4 is when you can first start to make contributions.

But the idea with these is that kids can get some seed money from the government. So this is a thousand dollars for kids born in 2025, 2026, 2027, 2028. Okay, so those four years are it for the thousand dollar gift or grant. Now, older kids can also have these accounts as well. They’re not going to get the thousand bucks, but they can have these accounts. They have contribution limits up to 5,000 per year. And what’s cool is that unlike the IRA where you do have to have earned income, with the Trump account, the child doesn’t have to have earned income. So this means parents, maybe even if the child is working part-time or during summers, employers can also contribute up to 2,500 a year, so half of the annual contribution limit from employers. They’re kind of similar to an IRA in that regard where we do have an annual contribution limit, but it is an after-tax contribution. So there is not a tax deduction for those upfront contributions, except if the employer puts the money in. Actually in that case, you can exclude that money from your taxable income. So there are some benefits. Even if a parent’s employer wants to contribute for the child’s account, or the child’s employer wants to contribute to their account, there are some advantages there. Once the child turns 18, that account kind of magically turns into an IRA. So it will have the same rules as a traditional IRA at that point. And basically the earnings are growing and growing and then once you’re in retirement, you can make those withdrawals. They are taxed at the time of withdrawal at the ordinary income rates of the child. So they’re kind of like an IRA, but they’re not exactly like an IRA. They’re really different.

Some people are asking, should I do this for education or is the 529 better? My answer is do both. If you have a child who was born during those four years, get the thousand dollars. Get that seed money, get the account open, but don’t necessarily count on that account for education because you’re gonna get more benefits with the 529. Those tax advantages allow you to pay for education tax-free from the account. So you’ve just got more tax advantages with the 529 for education purposes.

John Lanza (29:41)
Yeah. Plus for education purposes, this is really for more for a retirement account in the end than it is for education. Is the 1000, that’s a one time right? You don’t get that for every going every year. I mean, it’s it’s it’s a terrific incentive. And it sounds like it sounds like a no brainer. So are there any trade offs or uncertainties about these accounts that parents need to understand before jumping in?

Laura Adams (29:58)
It is.

Yeah, you the only thing is that these accounts are going to be held at the US Treasury and they are going to be very limited in your investment choices. Basically, you’re going to have an index fund. It’s going to be a very diversified portfolio. So very simple, you know, kind of required types of investments. However, they are saying that perhaps in the future, you may be able to transfer them into your own brokerage.

So there may be some changes on these. And the $5,000 per year is likely to be adjusted for inflation. So that number will likely grow annually. So I don’t really see a downside with these. I would go ahead and apply for the account, especially if you’ve got in a newborn or you’re going to have a child within the next year or two. And just make sure that you’re getting set up for it.

More details will come out in July. And at that point, you know, basically, you can, I think, learn a lot more about them. I think right now, we’re just kind of getting some general guidelines about these. We’ll probably get a lot more information from the IRS as we get closer to them actually existing.

John Lanza (31:27)
Good. Well, that is very helpful. I will also link to you because you have a great episode, but the 10 minute episode on those accounts too. That’s very helpful. So we’ll include those in the show notes. Another important point is this came up because one thing, these are all vehicles that when you put the money in the money itself is not invested. Correct? Like you have to actually have, there’s another step you have to take. Correct, Laura?

Laura Adams (31:56)
Yeah, you know, when you, and I’m not sure on the Trump account if it’s gonna automatically go into an account or if it will be sort of a holding account first. But yes, and that’s a great point because in a lot of cases, if you just make contributions and don’t actually select investments, the money may sit in a money market account earning very little. And I have known people who said, you know, it took me a couple years to realize that my money was just going into the money market and it wasn’t actually being invested. So that’s a great point. Double check what investments are on your menu. What are your choices? And decide on an allocation. In many cases, they’re pre-selected. If you say, hey, this is my level of risk, I’m more conservative or I like more risk, it will recommend a mix of accounts or a mix of portfolio for you based on your tolerance for risk or your timeline. But yes, if you’re not aware of what the money is in, double check that so that you’re getting as much growth as possible.

John Lanza (33:08)
Great. Thank you for clarifying that. I think that was important because that comes up all the time. Another thing I want to clarify, because I think a lot of people listening will understand this, but I think it is worth fully understanding the idea of pre-tax contributions and post-tax implications. Can you just go a little bit deeper there, Laura? I want people to come out of this if they were unsure, to be sure. To come out being, okay, now I understand how that what that issue with what what I need to understand about pre and post tax implications and contribution.

Laura Adams (33:44)
Yeah, and it’s a common question. Should I use traditional, which are pre-tax accounts, or Roth, which are after tax? With a, let’s say you’ve got $50,000 of income and you put $5,000 into a traditional IRA or even a traditional 401k if you have something like that at work. What that does is basically, takes $5,000 off of your taxable income. So you’re not going to pay tax on $50,000, you’re only going to pay tax on $45,000 of income because that $5,000 went directly into a pre-tax account. So that’s a great benefit, especially if you need a tax deduction in the current year. The downside of the traditional account is that all of the withdrawals that you make in the future, not only the contributions, but all of the growth in the account will be taxed as ordinary income when you take withdrawal. So you don’t pay tax upfront, but you are gonna have to catch up. The government’s not gonna let you skate. They’re gonna make sure that you’re getting your full tax bill on those withdrawals. Now.

John Lanza (34:56)
You

Laura Adams (35:02)
Roth accounts are just the opposite. You’re going to make after tax. So if you’re making 50,000 and you put 5,000 into a Roth IRA or a Roth 401k, you’re going to be taxed on the full $50,000 of income. Those contributions don’t help you at all in the current year. But what’s so great is that as the account grows, when you take withdrawals in retirement, they are entirely tax free. So for young people, the huge advantage is that you’ve got all this time for the account to grow. And that could be a huge tax bill when you think about the growth in the account. And you get to just say, nope, it’s tax free. I get to take this completely without the government telling me what to do with this money. And so that’s really nice to have in retirement.

John Lanza (35:55)
It is pretty amazing. You have to say, mean, growing money and taking out tax free, it’s an astounding opportunity. Okay, let’s go through the kind of span of ages kind of quickly here. So if an eight year old is genuinely curious about investing, what do you think is a good first move?

Laura Adams (36:04)
It is.

Yeah, that’s great. I mean, it might be to figure out, ask the eight year old, you know, what do you want to do with this money? I mean, again, it comes back to should we be saving this money because the eight year old wants to buy a bicycle, you know, in a few months or next year? Or is this something where it’s, you know, maybe a longer term, the child really is wanting to just kind of let it go and watch it grow. And in that case, you know, maybe we go for a youth brokerage account. That could be one option. So again, this would be available if you’re like 13 to 17 years old in most cases. It could be a high yield savings if we’re thinking more short term, you know, or it could be something where mom and dad could get involved. It could be something like, you know, a custodial account if the child is saying, hey, you know, I’ve got, I’ve got money from birthdays or holidays and mom and dad want to control that, but they want it in the child’s name. That’s an option. So you have a lot of different ways to go. I would say, you know, get clear on the the risks. The child maybe should be aware that, you know, this money could go down in value if we invest it. Are you okay with that? You know, and making sure they’re fully aware of the difference between saving and investing.

John Lanza (37:37)
You.

Yeah. Do you think we should focus on real money and conversation, or do you think it is, do you think simulation has any value here in the stock market side?

Laura Adams (37:59)
Sure, I I think simulation has wide appeal. I know a lot of people who paper trade, basically looking at, I’m gonna invest paper dollars, I’m gonna invest $100 in a stock and then look at it and say, if I had invested 100, well, today it would be worth 200 or today it would be worth $10. Really understanding the fluctuation in the markets.

That could be a great exercise for kids. It’s also a great exercise for adults who are thinking about, should I be day trading and should I really be trying to get more involved? Sometimes it sounds easier than it really is. Not even the professional money managers can tell you what is gonna happen day to day with stocks. So yeah, looking at simulation can, I think, be very educational.

John Lanza (38:55)
So when you’re saying paper, you’re saying fake money, right? That’s just so that’s clear. Yeah.

Laura Adams (38:57)
Exactly. We’re trading on paper. We’re just saying, okay, if I had invested this much money, okay, here’s what would have happened on a daily basis. So it’s like a, you know, it’s like a fake trade base, a pretend trade, just in order to understand the results.

John Lanza (39:11)
Yeah.

I think that’s interesting. I think then you can have the conversation to say, how would you have felt if that, if your stock had gone up, in which case they’d probably be upset that they didn’t take, didn’t get that advantage. But then if it goes down, then you have that conversation too. I like that idea with the simulation. That’s, that’s good. I had been a little bit anti-simulation because I felt like it made things feel very casino-esque.

Laura Adams (39:40)
Yeah.

John Lanza (39:40)
But I think if you do it in that in a way where you’re making sure that there’s a reflection about the ups and downs, that could be valuable.

Okay, let’s talk about older kids. We’ve talked a lot about them. Anyway, we’ve already talked kind of a little bit about the Roth IRAs and that makes sense once they are earning some kind of income that you should highly incentivize them. Any further thoughts on the Roth IRA? Let’s say your 15 year old gets a job and now they can qualify for a Roth IRA. Any additional thoughts that you want to throw in there? Any way we can incentivize them if they maybe aren’t so interested in investing any money?

Laura Adams (40:23)
Yeah, you I love the idea of a parent being the one to make the contribution for the child as long as the child has earned that contribution. Again, even if they make $500, they’re eligible to contribute up to $500 to the account. And the parent could say, hey, if you make this money, I’ll match it by making a Roth IRA contribution on your behalf. And then, you know, hopefully you’ll see that grow. But yeah, that’s the first account that I recommend for young people. Just get that account open and put as much in as you can. There’s no requirement. So there could be years where the child puts nothing in, but there might be years where they can actually max it out. And again, for 2026, it’s gonna be $7,500.

John Lanza (41:16)
That all makes sense. How do you prevent teens when they want to start doing investing? I’ve seen this with my own kids. I see it with a lot of kids where some interest is driven by some kid, some friend of theirs tells them that they made some money in crypto or they made some money in a meme stock, whatever it is. How do you help? How do you get them to understand the idea of long-term investing versus kind of short-term investing, which I kind of like to equate to gambling? How do you do that?

Laura Adams (41:50)
Yeah, it is interesting. I think just kind of going back to the simulation conversation, just sort of showing the history of that, even Bitcoin showing the huge rise and fall and the huge volatility and kind of making them understand, you don’t really have a whole lot of control over where you are on these ups and downs. And if they are just super interested, I mean, I do think a great way to learn is to get involved, but limiting and saying, okay, you can invest up to a certain dollar amount that the child is going to be okay with losing entirely could be a good learning lesson. Again, we don’t want the child to invest everything that they’ve saved, but really giving them maybe permission, you know, it’s sort of like an experimental amount that they can do something with. Sometimes those personal learning lessons go a lot farther than anything mom and dad are gonna say.

John Lanza (42:54)
Yeah, I think it’s a great idea taking a certain amount of money. I think Jason Zweig’s The Intelligent Investor calls it like “mad money.” So if you, if you have to invest, take 10% of whatever you’re going to invest and put 90% in the boring stuff and 10% have some fun with it. I think that’s a very wise way for people then to who really.

Laura Adams (43:03)
Yeah.

John Lanza (43:15)
Kind of want to take a chance, it gives them that opportunity. And it’s in line with everything we talk about here at The Art of Allowance Podcast, which is we are trying to empower the kids and you hit the nail on the head, which is we all learn by experience. The way that using money, losing money, gaining money makes us feel is the way that we are going to actually learn how to use money more effectively as we get older, right?

Laura Adams (43:43)
That’s it, know, unfortunately, some of the losses that we have are going to stick around in our brains way longer than the wins.

John Lanza (43:47)

I really like this idea of maybe putting up the Bitcoin chart and then the compound interest chart, something like that. I mean, granted, they’re going to be different timelines, but I think there’s some power in that. So thank you, Laura. I think that’s terrific. And maybe we’ll put some of those links so people can kind of have easy access to show those to their kids when that conversation comes up.

Laura Adams (44:17)
Yeah, yeah, that would be great.

John Lanza (44:19)
So let’s talk now about the young adults, these launchers, as I like to call them. So what investing mistakes are the most common in the first years after kids leave the nest? These are, they’re the kids’ investing mistakes.

Laura Adams (44:32)
Yeah, you know, I can relate. Basically, my biggest mistake was not getting started soon enough. When I was first out of college and had my first job, everybody kept talking about a 401k, 401k. I had no idea what they were talking about. There was no formal education, nobody really explaining things. It was just gibberish to me. Therefore, I stayed away from it.

You know, if you don’t understand something, you don’t want to participate. So, and I also thought that the money would stay with the company if I were to leave. And I knew that I wasn’t gonna be in this job more than maybe a couple years. And so I thought, well, I don’t wanna risk leaving my money behind. I really didn’t understand the concept of a rollover taking that money, having it be portable.

So that I think, you know, just feeling unsure about what your options are and not speaking up to say, well, what is that? How does that work? How can I really participate and what are the risks? What are the pros? What are the cons? Yeah, I often think if I had started a few years earlier, maybe how much more I might have. But you you just say, if I’ve missed a few years, if I’ve missed even a few decades, we’re going to just do the best we can looking forward. You know, there’s no shame in getting started later in life and investing if you did make some mistakes early on and maybe missed some opportunities.

For those who are self-employed, there are also great retirement accounts. I think a lot of young people maybe have like some side hustles or gig economy jobs and they don’t realize that they can also be investing a portion of that money, whether it’s full time or part time, they can be using some really nice accounts like a solo 401k, or a SEP IRA, which is the type of account I have. These are designed for people who either own businesses or have self employment income. So you know, don’t just say, I don’t have a job with some cushy, you know, retirement plan. You’ve got IRAs, you’ve maybe got self employment plans as well. So there’s something out there for everyone.

John Lanza (46:56)
That’s great. I think it’s worth just doing a very quick description of the 401k and the SEP IRA just so people know what they are, what they mean.

Laura Adams (47:04)
Yeah, yeah. So a solo 401k is basically very similar to a workplace 401k, except as the owner of your business and the worker in your business, you get to kind of contribute as both. It’s kind of like you wear two hats. So you get to contribute as your own employee up to the annual limit, which is 24,500 for 2026. But as the employer, you get to contribute more based on the net income of your business. So the limits are quite high. They’ve gone up to 72,000 for 2026, if you have that much income. So, you know, the more you earn, the more you’re able to contribute to these plans. And you’ve also got things like catch up contributions, which lets you contribute even more if you’re over 50. And now super catch up contributions if you’re from 60 to 64. So those are some benefits of the the solo 401k. That’s an account though only for those who do not have employees other than a spouse. So you’re kind of a solopreneur type of person.

If you have employees or maybe think you might want to hire people one day, the SEP IRA is a better option. It has the same like very high contribution limit up to 72,000 but it’s a little bit different. You don’t get the catch-up contributions. It doesn’t have quite as many sort of bells and whistles as the solo 401k, but it’s also very easy to administer. You can just kind of make contributions whenever you want. You don’t have to pay yourself like a paycheck and then deduct the contribution out of it. So it’s a little easier, I find at least, easier to administer and a little bit more flexible.

John Lanza (48:59)
Yeah, it seems like one of the primary goals we want as parents is to instill in our kids this kind of investing mindset so that the idea of the catch up or the super catch up contributions is just unnecessary for them because the big thing they’re missing, you touched on it earlier, is that the thing they have in spades over everybody else is time. And if they can just take advantage of that, it’s why we all regret the not investing more in in our 20s, or in the case of some, you know, incredible investors in their 10s and in their teens. And that’s the reason we’re having this conversation. So this is all great stuff, Laura. So what let’s talk about like financial separation. So what is a healthy financial separation look like for parent and child as they leave the nest.

Laura Adams (49:54)
Yeah, that’s a great question. And it’s so different for everybody. I remember my auto insurance was the last thing my parents were paying for. And I was hoping that they’d forget all about it, but of course they didn’t. Yes, I think if you have, and it does depend on a child’s, their career, you know, are they going into graduate school, you know, there’s just a lot that goes into this. But I do think that setting up that separation as early as possible certainly is gonna help kids as they launch and become financially independent. Of course, we’re gonna talk about banking. I think kids definitely, you know, need to have their own banking. Even credit cards, this is very controversial, but kids need to create their own credit histories. And the only way to do that is to use a credit account responsibly. And so you can build a little bit of credit being an authorized user of a parent’s credit card, but if a child can get a credit account in their own name and use it responsibly, that’s just the surefire way to start building your own credit. And that means when you’re ready to buy a car, you’re ready to buy a home, you’re gonna be subject to some favorable interest rates that are out there compared to people who don’t have good credit. Eventually that’s gonna save you a lot of money. So I think that separation is important for credit. It’s important just for management. And again, like teaching kids what are the expenses, you know, like the auto insurance, all of the things that they really do need to be thinking about. So I say, you know, in college is a great time to make sure kids have their own bank accounts and credit accounts. Parents again can put limits on these, they can make sure that the credit accounts are, you know, have a low limit so that kids aren’t subject to abusing them.

John Lanza (52:03)
Very helpful. Thank you, Laura. If you could instill one investing habit in every young adult, what would it be?

Laura Adams (52:12)
Yeah, you mentioned it, it’s start early. If you start early, that’s actually much more important and much more of an indicator of success than how much you invest, believe it or not, or even what you invest in. That compounding over time is so powerful. Think about this, every 10 years, your investments will double if you are earning 7.2%. This is called the rule of 72. So if you think about your investments being able to actually, and 7.2% is pretty doable, that’s a pretty doable return. Thinking about that money being able to double every decade of your life, that’s super powerful. So even that one extra decade, investing for 50 years instead of 40 or 40 instead of 30.

John Lanza (52:52)
You

Laura Adams (53:09)
Can make a huge amount of difference. So just thinking about time, as you said, John, your most precious resource, even being more important than the amount that you can invest.

John Lanza (53:22)
Yeah, and the thing that kids have and they may not have a lot of money yet, but they certainly have plenty of time.

I just have two institutional questions and then one question for you and then our fast and fun round questions. Just because we do work with institutions, I’m just curious, like what do institutions often, what do they miss when, what opportunities are there to help families understand investing better? Any thoughts on that?

Laura Adams (53:30)
Yep. Yeah, you know, I think it would be interesting maybe if some of them as we were talking about simulation you know if maybe if more of them did involve some of that simulation fee free you know not being able to kind of play around a little bit with that and I’m sure there are some apps out there that do have some some simulation involved but I think that could be really helpful. Many people are afraid to invest and so by seeing it actually happen, like yes, if I put the hundred dollars in this particular index fund, you know, it would be worth X, you know, next year or is worth that much today, that might help get them a little bit more comfortable with investing. And I think help maybe parents teach kids, I think parents maybe feel a little uneasy about their own financial situation sometimes, and that keeps them from being good teachers or good role models.

John Lanza (54:50)
Yeah.

Laura Adams (54:54)
So yeah, and of course the financial literacy tools are built in to some of these programs and that’s fantastic. But it’d be great if the parents were involved in that to kind of make sure that kids were taking advantage of all of those literacy opportunities.

John Lanza (55:12)
Yeah. If you were advising a credit union CEO, for example, what would you tell him or her to focus on?

Laura Adams (55:20)
Wow, mean, I think I’m such a big proponent of financial literacy. I would say, what can you do in your local community to make sure that you’re, you’re bringing people into this literacy journey, whether it’s free courses or online, you know, events, what could you do that is gonna be a win-win. It’s gonna teach people and young people very foundational concepts, but also expose them to your business and who is eligible to be a member. A lot of people might be eligible, but not even realize it. So I love credit unions and I think they are just amazing resources for communities, but a lot of people don’t, don’t realize what they offer or perhaps how good their products are.

John Lanza (56:16)
All right, so what is one investing belief that you’ve changed your mind about over time, Laura?

Laura Adams (56:25)
Wow, geez, there are probably so many of these. You know, I used to be a big real estate investor, and I think some people can do quite well with real estate. I have just seen it, you know, the ups and downs over the decades.

John Lanza (56:30)
You

Laura Adams (56:51)
And I am just fine not to be a real estate investor anymore. Out of all of the investments that I made in real estate, I maybe came out ahead a little bit, but probably not a ton. Some were great winners, but some were losers. So I would say stick with what you know, even though I had been a real estate agent in my early career, and I thought I knew a lot about real estate. Investments in real estate are not as simple as they may appear. So I would say again, stick with what you know. For me, I kind of came around to the idea of, you know, just having a diversified portfolio that’s very simple to manage, of like hands off, works really well for me. So I’ve come around from that.

John Lanza (57:43)
It’s very interesting how so many experts in money come around to the simplicity. All right, Laura, are you ready for the fast and fun round now? Okay, so what does the term money empowered mean to you?

Laura Adams (57:54)
Let’s do it. Yes.

My gosh, I mean, it means financial success, means building wealth.

John Lanza (58:06)
What is the best investment of time or money you’ve ever made in yourself?

Laura Adams (58:12)
Yeah, I would say it’s exercise, it’s health, it’s playing tennis and trying to achieve, you know, better physical health.

John Lanza (58:23)
Very nice. What is a piece of financial advice you hope the next generation truly takes to heart?

Laura Adams (58:30)
I would say I hope they again start early and make it tax advantaged. Use that Roth account please, it’s so good.

John Lanza (58:43)
Can’t argue with that. Okay, if you could transmit one message about money, skywritten, on a billboard, wherever, what would that one message say?

Laura Adams (58:53)
Wow, that’s so good. I think it would be money is a tool for happiness. I think a lot of people don’t really see money as a tool. They see it sort of as the end, like, I’m just supposed to accumulate as much money as possible. Using it for happiness, that’s the whole purpose.

John Lanza (59:10)
Beautiful. Hope we see those billboards soon. So other than your own materials, what’s one money book, podcast or resource that you return to or you recommend or gift the most often?

Laura Adams (59:29)
Yeah, you know, gosh, there are a lot. I really enjoy The Millionaire Next Door. That’s one that I often recommend. I think it kind of opened my eyes a little bit to what it means to be a millionaire. So that’s one I love. I’m trying to think of what else in terms of podcasts. I recommend a lot of retirement podcasts to people who are really kind of approaching. that, but I would say, gosh, anything even like Planet Money, some of the NPR shows I think are great for younger people who are really just kind of trying to understand economics. That’s a great show. What else is good? I mean, there are a million out there. I think searching and trying out a bunch of different different podcasts might be the way to go for especially for young people to try to understand what what’s interesting me is it investing? Is it more business? Is it you know, solo becoming a solopreneur? There’s a little bit out there for everybody. So use your your app and search and I love that people are watching podcasts now on YouTube and that’s an incredible search engine. So just searching for what you’re interested in.

John Lanza (1:00:54)
Well, that brings us full circle to Money Girl because how can people find you, the Money Girl, Laura Adams, how can they find out more about you online?

Laura Adams (1:01:04)
Yeah, so Money Girl is in all podcast apps. We are on YouTube as well. They can visit my website at LauraDAdams.com to learn more. And yeah, the show is twice a week. We really enjoy digging into listener questions. So if you have a question, I would love for you to submit it. And I can feature it on a Finance Friday show.

John Lanza (1:01:27)
Well, Laura, this has been an education and I appreciate you sharing so much of your broad knowledge with us. I think it’ll make it much easier for parents to kind of jump into and feel more comfortable about the investing game. So thanks for joining me for this conversation.

Laura Adams (1:01:43)
Thank you, I appreciate it.

John Lanza (1:01:45)
I’d like to follow up with some quick thoughts on what I hope you’ll agree was a great, useful conversation for parents. On the practical side, let’s all take Laura’s advice and make sure that when our kids put their money into a Roth IRA, a 401k, or whatever vehicle they’re using to invest, that the money isn’t just sitting there in a money market account. You’ll be surprised. It’s not at all obvious to more people than you might think. Don’t let this happen to your kids. Make sure that money is invested in something that will grow. We always seem to come back to the value of time in investing and of course the importance of starting early. And I’m struck by how many money experts have traveled through the valley of complexity just to come out on the other side realizing that simplicity is the answer. Laura today and JL Collins of The Simple Path to Wealth, whom I’ve interviewed before, come immediately to mind as examples.

Laura noted that simulation could be a great exercise for kids when it comes to investing. It’s also a great exercise for adults, she said. And this reminded me, it just got at this core point of much of what we do here at The Art of Allowance Podcast or Art of Allowance Project, which is we often learn as much, if not more than our kids when we are actively participating in raising them to be money smart. And I also want to second Laura’s recommendation for The Millionaire Next Door. It changed my perspective about who the majority of millionaires are and how they got there. I think it’s worth a read. And finally, if you’d like to sign up for my newsletter, Money-Smart Monday, or find out more about The Money Mammals, my book, The Art of Allowance, and our program for credit unions across the US, please come to themoneymammals.com. And until next time, thanks for listening.

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