An important goal for me is to train my children (12 and 10 years old) about personal finances and investing. For some odd reason their eyes glaze over whenever I start talking about NPVs, DCFs, IRRs and calculating a compound annual growth rate using a logarithmic function in Excel (go figure!). It took a while, but I finally learned that they respond to stories. Given that, I have used stories to foster their interest in personal finance and investing.
Some time ago I heard a compelling story of two twins and their financial journey. Obviously, it was not original with me and recently I found this Motley Fool article that relates the same story, albeit in a much more abbreviated form. Their version was much too short for my kids, so here is my longer version:
A long time time ago two twins were born into a middle class family. The twins were named Jack and Jill. Though they shared the same birthday, Jack and Jill were very different.
Jill was ambitious and extremely competitive. She made straight A’s in school and strove to be the best she could be. Jill’s parents were proud of her. They knew one day she was going to be very successful.
Now Jack was more reserved. He didn’t do quite as well in school, normally making C’s in most of his subjects. Jack was a dreamer, he started many projects, but never seemed to finish any of them. This concerned Jack’s parents, who loved him very much.
As the years passed, Jill continued to succeed in all her endeavors. She was always looking over her shoulder to make sure she was doing better than her brother, who somehow always managed to come in second behind her.
The twins graduated high school at age 18. Jill had the best grades of anyone in her graduating class, by a wide margin, and was named the valedictorian. She had multiple scholarship offers to prestigious universities. Wanting to be a surgeon, she chose the one with the best medical school.
Jack once again didn’t fare as well. Graduating in the middle of the class, he had no scholarship offers; that left the local community college as his only option. There were many forms to fill out and the admission office was not very helpful. Jack quickly tired of the process, and once again he just quit and took a job at a local hardware store earning minimum wage.
Jack’s father was a wise man. He was very concerned about his son’s future and tried to talk him into going to college, but Jack would not budge. Jack finally agreed to send the first $5,000 he made each year to his father who would invest it for him. Jill always being the jealous type asked ‘will you handle my investments when I get out out college?’ The father replied ‘I sure will.’
Jill went off to college and Jack continued to live at home. He did just as he said he would and sent his father $5,000 to invest each year. But alas, at age 25 Jack met a pretty young lady and they were soon married. By the age of 28 Jack his wife had two children and his meager salary could no longer support his family and allow him to invest $5,000 each year; so once again Jack quit, and did not send any more money to his father after the 10th year. His parents were very concerned.
The years quickly went by as Jill went off to college, then medical school and finally served her residency. As in the past Jill succeeded beyond expectations. She became a well-respected and highly sought after surgeon. Jill married a doctor and they had two children.
With all the debt Jill and her husband accumulated in medical school they weren’t able to start saving any money until she was 30. Jill remembered that her father agreed to manage her investments, so she sent him $5,000 a year, as Jack had done. The father being financially wise invested both Jack and Jill’s money in a mutual fund that was designed to track the total market’s return.
The years flew by and soon Jack and Jill were planning their retirement party. Their parents who were now in their late 80’s agreed to host the gathering. Jack was the manager of the hardware store and his meager earnings did not allow him to pay much toward the party. Jill did not mind picking up the cost, since she and her husband earned a good salary.
The day finally came for the party and all in attendance had a wonderful time. As the party was beginning to break up, the father tapped his glass with a spoon to get everyone’s attention. He said in a loud voice. “Before everyone leaves, I have a presentation to make. ” He then relayed the story how Jack and Jill had sent him money to invest for their retirement; with Jack only sending $50,000 over 10 years before his family situation forced him to stop, and Jill sending $180,00 over 36 years. Jill beamed as she always did when besting her brother.
At this point I stopped and asked my kids “who do you think will have more money?” They both said “Jill will have way more.” I respond with a “let’s see”.
The father said, “My job is complete, I am here to present my children their retirement accounts. ” He handed each child an envelope. Jill quickly opened hers and and was pleased to see her $180,000 had grown to over $1.9 million. “Don’t worry Jack, I have enough here that I can help take care of you.” Before Jill could continue their father said, “that won’t be necessary Jill. Jack open your envelope.”
Jack opened his envelope and was amazed to see his $50,000 had grown to over $4.4 million. For the first time in their life, Jack had finished ahead of Jill and she didn’t know how to handle it. “How can this be?”, she asked their father. “Did you contribute extra money to Jack’s account? Did you invest it differently?”
“No.” replied the father. “I invested what each of you sent me into the same mutual fund. The most important thing is not how much you contribute, but when you contribute it. Here look at this schedule JackJill.pdf (alt.1, alt.2) and you will see how each of your accounts grew over the years.
Check back tomorrow and in Part II I will post a link to the Excel model I used to generate Jack and Jill’s account schedule and discuss how you can use it. I will also post some tips that I picked up when discussing this with my children.