Investing isn’t just a luxury reserved for adults, kids can get in on the financial rewards, too.
In fact, it can prove to be even more valuable for their future. That’s because children have the precious gift of time on their side — giving their money the best chance to compound and grow.
Teaching your kids how to invest can also be a great way to encourage smart saving and spending habits long before they become adults.
“Investing can mean a number of things, but one way to look at it is teaching your kids to invest in themselves,” said Heather Winston, a certified financial planner and an assistant director in Retirement & Income Solutions at Principal. “The adage that knowledge is power is certainly true and talking regularly about investing helps to remove the mistaken belief that investing is only for the very rich.”
So if you’re wondering how to give your child a head start on building their wealth, these tips can help.
Start with the basics
For young children, start by teaching them basic money concepts. This can include paying your child an allowance or asking them to help you plan a grocery store trip with a set amount of money and sticking to it.
By doing this, you’re helping to instill in your child the idea that having and earning money comes from taking responsibility, and just how important sticking to a budget can be.
“There are numerous ways to talk to kids about investing but the first one is simply to start,” said Winston. “It doesn’t have to be a deep, complicated, or drawn out conversation — instead, think small, short learning moments.”
As they get older, you can begin introducing them to other money concepts, such as setting saving goals to purchase items like a new gadget or even getting a head start on contributing to college savings.
Winston suggests that parents also try matching what their child is saving for big-ticket purchases, assigning their child to cover a percentage of what it costs.
“Teaching your children about the value of money is a skill they will have for their entire lives so make it a priority and have the conversations often,” she said. “The key is that investing is a process that requires some planning and patience. Starting when your children are young is a great opportunity to support them as they learn.”
Discuss investing concepts
Once your child has a grasp on spending and saving fundamentals, you can introduce them to basic investing concepts, such as “what is a stock” or “what is a bond.” Keep the discussions simple and easy for your child to understand. You should also be prepared to repeat and reinforce these types of concepts often for your child to learn them.
Financial experts suggest elementary school as a good time for parents to start introducing these concepts.
“The road to successful investing starts with good savings habits since you need money left over after expenses in order to invest,” said Milo Benningfield, a certified financial planner and founding principal of Benningfield Financial Advisors. “Talking about the in’s and out’s of cash flow and the parents’ own savings goals can go a long way toward helping kids understand what it means to manage money responsibly. “
Benningfield recommends that parents teach their children two major investing concepts.
One is that it’s “time in the market,” rather than good “market timing” that pays off in the long run. In other words, keeping money invested for a long time is more important than which investments you choose.
The other concept is that with investing, “you don’t get what you pay for,” which means that investment costs can eat away at investment returns — so it’s essential to keep your costs low.
Determine what type of investment account to set up
Choose a firm that has low fees and good customer service ratings. If your child is younger, you can start them off with a basic savings account.
“Savings accounts help kids see the long-term effects of disciplined saving, and they can then reap the rewards by spending that money on something meaningful or giving the money to a charity that’s important to them,” said Justin Pritchard, a certified financial planner and founder of Approach Financial. “Although interest rates are low now, it’s still worth showing children how compound interest works.”
From there, choosing an investment account will depend on one crucial factor: if your child does or does not have earned income.
If your child has earned income, consider a custodial Roth IRA: Parents will need to help open and manage the account while their child is a minor. But as long as the child has taxable wages and income, they will have the ability to contribute.
For example, if your child earns income from a part-time job, they can invest earnings up to $6,000 each year, provided they earn at least that much.
You can withdraw contributions from this type of account at any time without incurring penalty fees. This can be great for when it’s time to make a big purchase, such as buying a car.
While there are no tax benefits on the upfront contributions, the money in the account grows tax-free, and there are no taxes owed on withdrawals.
That can be especially useful if they need to access the money for education expenses or even make a large purchase later in life, such as their first home.
If your child doesn’t have earned income, consider a custodial brokerage account: Parents should expect to control investments in this account until their child reaches the age of majority, or the age of 18 or 21 — depending on the state they live in.
It’s important to note that any money deposited into these accounts are strictly for the child and their benefit. Although money can be withdrawn without penalty, paying for expenses that are unrelated to the child is prohibited. Acceptable withdrawals could include things such as paying for braces or purchasing school supplies.
There are two types of custodial brokerage accounts: UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act).
- UGMA is primarily for assets that include stocks, cash, mutual funds, insurance policies and other securities.
- UTMA allows for nearly any type of asset, which can include real estate. Vermont and South Carolina are the only states that have not adopted UTMA laws.
Help them figure out what to invest in
There are a few ways parents can help their child decide what to invest in.
One good rule of thumb is simply getting your child thinking about what they know: stores they shop at, games they play, food they eat or household items they use.
“Kids can decide what to invest in by merely looking around and being curious about everyday things,” Winston said.
Parents can also show their child how to follow stocks’ prices on trading platforms and kid-friendly apps, such as Acorns and Greenlight.
Shelly Lombard, a former Wall Street analyst and founder of MilleMoney, a personal finance website for Millennials, suggests talking about how news on a company or stock might affect its price.
“If Disney announces that its new streaming service has many new subscribers, ask them, ‘Do you think that will make Disney’s stock price go up or down?'”