Your Kids and Investing
Posted on April 5th, 2010
As a parent, it’s your job to ensure your children have everything they need to make it in the real world. But have you taught them about the power of saving and the value of investing? With a little time and effort, they can learn how to build wealth for life.
Kidvestors Rule
Kid investors have three advantages that adults are hard-pressed to match:
Time. With investing, time literally is money. There is absolutely nothing that creates wealth like compound interest over time — it’s the one ingredient that can potentially help investments grow.
Disposable income. A portion of birthday and holiday cash, allowances and money your children earn doing chores can help them get started.
These relatively small income streams are huge when you consider that whatever amount of money comes their way is usually 100 percent disposable — each and every dollar has the potential to be invested.
They can invest automatically. Even investing just a few dollars a week could yield amazing results.
For example, let’s say your child was able to invest roughly $2/day for 21 years. When compounded monthly at 8 percent, your child will meet their 21st birthday with a nest egg of $39,282.
The School of Stock
To help them truly understand these concepts and put them into action, stay focused on the basics:
- Start with saving. Before you talk stocks, help them start a “pay yourself first” savings plan in which each dollar is divided between spending and savings.
- The spending pot can be spent anytime, for whatever your children want. They can even save up the money for larger purchases. But the savings pot is for one thing only: building wealth through long-term investments.
- Keep it simple. Avoid lectures about the stock market. Just explain the difference between short- and long-term financial goals, and between saving and investing, in terms they can relate to. For example, if a child wants to buy a new Xbox, she should save up for it. But if she hopes to buy a cherry red convertible on her 16th birthday, investing is potentially the way to reach that goal.
- Make it real. Bring your discussions to life by opening investment accounts for your children. Then make deposits and review the performance over time. Though minors can’t open brokerage accounts in their own names, parents can set up custodial accounts under the Uniform Gifts to Minors Act, or the Uniform Transfer to Minors Act, depending on the laws in your state.
- Make it relevant. When it comes to stocks, look for quality investments that your children can relate to. For example, your young athlete may be thrilled to own stock in Nike, while a young fashion diva might like to get in on The Gap.
- Make a match. You can give your kids an extra incentive to invest their precious dollars by matching the amount they invest. Kids may want to invest more often when an allowance of $10/week becomes an investment of $20/week. And learning not to leave matching money on the table is an important skill for future 401(k) holders.
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Tags: Investing
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