Want to give your kids a gift that will pay huge dividends over time? Teach them about investing.
Let them try it while you’re still there to provide guidance. Allow them to make small mistakes now – maybe it’ll help them avoid bigger mistakes later. Give them a jump start on financial security.
I’m not talking about giving them money, unless you have extra to donate. I’m talking about helping them learn to invest their own money.
Starting Out: Saving
When our kids were younger, we developed a simple system for their savings.
When they receive money from chores, birthdays or grandpa emptying the spare change from his pockets, they can spend a portion if they choose. The rest goes into their piggy banks. At the end of each year, we all sit down together to sort and count the money. They can spend whatever they have collected in coins; the dollars go into their “big bank” accounts.
The system has worked well. They have learned to save more than they spend. On average, they each have placed about $100 per year into a savings account. In kindergarten, they loved tearing open their bank statements to see how many pennies they had earned.
But at 8 and 11, they are starting to understand how much things cost. They were growing increasingly less impressed with accruing a few cents in interest each year.
The Next Step: Investing
Less than a dollar in interest per year on about $1000. You’d shop around if that were your money. Everyone should keep a bit of money in a savings account for emergencies. But if you’re parking all of your extra money there, you certainly aren’t seeing as much growth as you could, right?
Same goes for your older kids’ savings. If they are old enough to earn a little bit of money and to understand basic finances, they might be old enough to start making supervised decisions about their money.
This year, we gave our kids a choice:
- Keep their money safe in a savings account – or –
- Move their money into a custodial investment account
We explained that it was their money and their choice. The savings account was safe, but never would earn them more than a scrap of interest. The investment account had the potential to earn much more, but… they also could lose money.
What?!? Lose the money they had dusted, vacuumed and pulled weeds to earn? We had their attention.
They asked some surprisingly smart questions, thought about it, and ultimately, both decided to move their money into brokerage accounts.
Opening a Brokerage Account
Many investment firms offer custodial brokerage accounts. If your kids have kid-sized amounts to invest, look for accounts that charge no initial fees, low or no trade commissions and low or no investment minimums.
Some kids may want to actively trade stocks. If so, you’ll want to lean toward companies that charge no trade commissions. Other kids may just want to watch their money to grow without interfering much. For them, look for companies with plenty of low-cost Exchange Traded Funds (ETFs) or Index Mutual Funds (Index Funds).
Custodial brokerage accounts initially are established under parents’ names, but children take full control when they are 18 or 21, depending on state laws. If your kids have earned income (allowances don’t count), you also could consider a custodial Roth IRA. Whatever you choose, please read the fine print about tax implications.
It only takes 10-20 minutes to open a custodial account, if you have the required information ready: Social Security numbers, employment information and routing info for the bank account that you’ll be using to transfer money into the new account.
Choosing Stocks and Funds
So, your kids have decided to invest, you have opened custodial accounts for them and transferred their money over.
It’s time to choose stocks and funds. You can start by having your children watch or read educational content, try practice accounts or noodle around on stock market games and simulators.
Or you can do what we did: Just jump right in.
Arguably the simplest way to start would be to first look at ETFs and Index Funds. They track an index like the S&P 500 or a Health Care Sector, so your child’s money is more insulated against a single corporation’s bad news day.
In general, if the market is up, these funds are likely to be up. If the market is down, these funds are likely to be down.
One of our sons chose a tech-leaning ETF; the other selected a broader S&P 500 ETF. So far, they both have earned more in a couple of months (about $50) than they had in all the years their money sat in savings accounts.
Our next step will be to allow them to research, then put a slice of their money into one or two individual stocks that they are familiar with – think Disney, McDonalds, Google, Mattel and the like.
Having money in both index-tracking funds and individual stocks should give our children a bigger picture view of the ups and downs they can expect from each — valuable insight before they have a mortgage to pay.
Why Teach Children To Invest?
We want our children to be financially confident as adults. We want them to be smart with their money.
They’ll make mistakes. We know that. Most young people do. But teaching them early how to manage their finances and recover from missteps is teaching them how to steer their futures in a positive direction.
And from a purely selfish standpoint? We want them to be financially secure in adulthood because my husband and I want to spend the money we have saved and invested on our own retirement.
Please do your own research before making financial decisions. I am not a financial advisor. I am a former business reporter who enjoys writing about personal finance.