(Attention Readers: There is a free book offer at the end of this column!)
John Wrenn is a man with a mission: he wants all Americans to understand the basics of investing. "I never had a course in elementary, high school or college that taught me what a stock was, or a bond or a mutual fund," says Wrenn, a broker at the Portland, Ore. office of Piper Jaffray.
Yet like millions of American workers, after landing his first job out of college he was faced with a bunch of important decisions about investing his contributions to his 401(k) plan, decisions he felt ill-equipped to make.
As a financial advisor for more than a decade, he is now well-versed in the language and nuances of the financial markets. But he gets frustrated because he frequently meets people who simply don't understand how to save.
"They don't think small amounts matter. But I know they DO matter." So Wrenn wrote a book — ostensibly for children — to teach people the fundamental principle of how money grows: compound interest.
Lucky the Golden Goose is the tale of a goose who got tired of being plucked by his employer, Farmer Fred. Every day, Lucky and all the other animals contributed to the production on Farmer Fred's farm, each according to his or her particular skills. The sheep kept the grass neatly trimmed.
The hens laid eggs that Farmer Fred later sold at market. Geese like Lucky got plucked for their down and feathers. In exchange, Farmer Fred paid all the animals in pumpkin seeds.
Lucky longed for more control of his life and the chance to retire one day. He knew that living from pumpkin seeds to pumpkin seeds wasn't going to get him either. So he hatched a plan: instead of spending his entire seedy paycheck every week, he'd set some seeds aside to grow his own pumpkins. Then one day he'd have more pumpkin seeds than he ever dreamed of!
He tried to get the other animals to join him, but they thought he was nuts. After all, just what can you expect to grow from a couple of pumpkin seeds? They wanted nothing to do with Lucky's plan. "The pigs blinked blankly, the hens cluck clucked, the sheep said 'Baah,' And the ducks simply ducked."
So Lucky set out on his own, planting a few seeds at first then plowing the seeds from the first few pumpkins back into the ground until (I love happy endings) Lucky had pumpkin fields as far as you could see. In fact, he bought Farmer Fred's farm and Fred went to work for Lucky.
The moral of the story is pretty obvious: it doesn't matter how small am amount you save, as long as you start. Or, as Lucky puts its, "If you take one pumpkin seed or one penny, saving and investing turns one into many."
While "compound interest" sounds like the last theme you'd base a story on-- especially one for children — Lucky the Golden Goose is very entertaining. If you're reading aloud to a child, you get to recite goofy rhymes, that include animal noises. (And you know how we all love barnyard humor!) But my favorite aspect of this book is the pictures — all drawn by Wrenn who admits to being a "lifelong doodler."
Despite the fact Wrenn's never promoted the book, it's developing a growing following via word-of-mouth. Parents who are total strangers tell him it's their child's favorite book. In fact, the parents have it memorized from reading it so often! "They tell me they're sick of it," says Wrenn, obviously delighted.
Besides sharing Lucky the Golden Goose with a child, I asked Wrenn what other things a parent or grandparent should do to teach kids about money matters. "First," said Wrenn, "read to your kids. Two, talk to them about money and last, set a good example." Of course, you need to keep the age of the child in mind. Very young ones might not grasp the concepts at first, but talking with a child makes them familiar with the language of money and finance so they're not intimidated by it later in life.
As for setting an example, Wrenn says simply, "Be a saver. Start a savings account. Put money into an IRA. Open a 529 college savings account with your child as the beneficiary and contribute to it monthly."
Once you've set up an account, share its performance with the child. Let her see the statements. Or let him pick out a stock — Disney is a favorite with kids. So is McDonald's. Or Nike. Show him where to look up the price in the newspaper. You don't have to go into earnings per share or the theory behind the Efficient Frontier. Eventually the concepts will begin to sink in because, frankly, the building blocks of financial knowledge are is not that complicated.
Take the concept of compound interest. It basically involves taking the gains an investment may earn (dividends, interest, capital gains, etc.) and adding that to your original investment. The next time around, you're earning interest on the interest as well as your original investment, also known as your "principal."
Clearly, the longer you can do this, the bigger the impact could potentially be. Here's a simple example: Suppose you have a newborn child and you want to set aside money for her college education. You decide to forego your usual daily latte and instead save that $2 a day for a total of $730 a year. You invest this amount in a 529 college savings account where it earns, say, 8% compounded annually — tax-free. After 18 years, when your child is ready to head off to college, this account would be worth $27,338. For the cost of a latte, you have managed to set aside a significant part of her college costs!
Now, suppose you don't get around to starting your latte withdrawal until your child starts kindergarten. This means you've only got 13 years before she starts college. Assuming the same parameters as above, instead of more than $27,000, you'd end up with $15,692. That's because you had 5 fewer years of interest earning interest. (Get it? C'mon, even a goose can understand this! )
If there's a child in your life — or you still haven't mastered the concept of compounding yourself — buy this book! At $9.95 it's the best bargain you'll ever find in a financial textbook — and the pictures are a whole lot better! You can check it out at www.lucky529.com.
Reading it to a child will enable the two of you to bond (in the human as opposed to the financial sense of the word.) You'll laugh together. Oink together. Crow together. More importantly, you'll be planting a little seed in that child that can one day grow into a lifetime appreciation of saving.
But for readers of this column, we've got a special deal. John Wrenn has graciously offered to send a copy of his book to the ten people with the best stories about a money-related experience with a child. It can be funny, or poignant or insightful or even sad. Or perhaps you had an effective way to teach a child a lesson about finance or investing. So write to me. You just might get "Lucky"!
May your interest — both intellectual and financial — always compound....
P.S. One more thing about "Lucky": this goose didn't wait around waiting for someone else to bail him out. He made his own "luck." You can't count on the government. Or the lottery. You've got to take responsibility for your own financial well-being!
If you have a question for Gail Buckner and the Your $ Matters column, send them to firstname.lastname@example.org along with your name and phone number.
The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.