Money doesn’t grow on trees — but it has the potential to grow when it’s invested.
Investing for your children is important, especially if you want them to go to college or you plan to help them establish or expand a business. But investing with your children can give them another important kind of education. By showing them how to manage their money and invest for their future, you can help prepare them for a self-sufficient, responsible adulthood.
One of the best ways you can instill good financial discipline in your children is to set a good example. Remember that kids learn by seeing, so if you want them to budget and invest, do so yourself. If instead they see you making impulse purchases on credit and never saving a dime, it’s unlikely that they’ll take your other financial lessons to heart.
The three-jar allowance
To learn how to manage money, a child needs some money to manage. Most childcare experts recommend that parents separate a child’s allowance from his or her responsibilities, since paying for things like good grades and chores makes those jobs seem optional rather than required. Instead, you can use the allowance as a chance to show your child how to create a budget and stick with it.
One popular suggestion to illustrate the concept of budgeting is to give your child three clear glass jars that represent current expenses, short-term savings, and long-term savings. Separating cash into jars discourages children from cheating and makes it easy for them to watch savings grow.
To create the budget, you and your child first determine an amount to cover current necessary expenses — such as lunch money and school supplies. Some parents also encourage their children to donate 10% of their allowance to charity each week. Next, talk about money for short-term saving goals. List things like toys, video games, and other big-ticket items your child might want. Finally, as part of the budget, make sure to earmark a regular sum to set aside for the future.
To give your child an incentive to put money in that third long-term savings jar, you can offer a matching contribution by putting in fifty cents or a dollar for every dollar your child contributes. And when your child is old enough, you can replace the second jar with a savings account and replace the third jar with an investment account.
You may also want to establish an auto-investing account in your child’s name. The amount you specify — from as little as $50 a month — will be automatically debited from your checking or savings account and added to the account.
Spark an interest in investing
You may want to use common stocks to introduce your children to investing. Stocks are easy to explain and can be fun, especially if you start with companies your children already know. Ask them to find companies that interest them — those that produce their favorite cereal, sports equipment, soft drink, or toy, for example. Once you buy shares, you and your children can track the company’s performance and stock price in the news.
To make learning fun, you can also set up a mock online portfolio. Some online portfolio trackers simulate real trading with a cash account you can use to buy stocks and pay broker commissions.
You might also help them find websites designed especially for young investors. There’s a list at Jump Start, and it’s easy to find a variety of resources online that can be both engaging and informative.
If you’re active in your child’s school, you might also want to suggest the possibility of incorporating financial education in the classroom or creating an investment club.
Setting up the account for your child
One easy way to give your child ownership of stock is to “sell” your child some of your own shares. If you’re planning on buying 100 shares of a company, for example, you could buy 101 and sell the extra share to your child at market price. You can keep track of which shares are your child’s in a separate register at home and transfer those shares when your child is old enough to open his or her own brokerage account.
If that arrangement is too casual for you, you can open a separate account for your child’s investments. You’ll have to decide how to set up the account, either in your name or the child’s.
There are three main ways to set up an investment account for a child:
- Guardian accounts. You’re the owner of the guardian account and manage it as you see fit. Earnings are taxed at your rate.
- Custodial accounts. The child owns the account, but taxable earnings are taxed at your rate until the child is 19, or 24 if he or she is a full-time student. You control the account until the child reaches the age of majority — generally 18 or 21, depending on the state.
- IRA accounts. If your child earns taxable income, you can open a regular or Roth IRA in the child’s name. You control it until he or she reaches the age of majority.
How To Teach Your Kids About Investing? by Inna Rosputnia
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