Kids are expensive. According to the USDA, raising a child can cost well over $200,000, not including the cost of college. Investing for their future is important, but teaching them smart financial habits, including how to invest for themselves, can give them a head start—and give you some financial breathing room.
Credit.com’s Tips for Teaching Kids about Investing
- Start with Savings
- Open a Basic Savings Account
- Teach Them Patience with a CD
- Move Up to Investing
- Open a Roth IRA
- Let Them Experiment with Microinvesting
- Teach Them to Invest in Stocks and Mutual Funds
1. Start with Savings
If your child is very young or new to the concept of managing money, you might want to stick to the topic of saving money at first. In order for these lessons to be most effective, it may be helpful to give your child an allowance for chores they complete. This way they can learn how money is earned and better appreciate saving and investing it.
Beyond the basics of earning money, start by explaining these ideas:
- Money isn’t infinite. That means no one has unlimited supplies of money, and you have to decide what you will spend yours on.
- Save money for future purchases. If you want something that costs a lot of money, you may have to save the money you have now and add to it over time.
- Save money for unplanned needs. Set money aside to save for later even if you don’t have a specific item in mind to buy. This way, when you need or want things in the future, you have the money already saved.
Open a Basic Savings Account
Help your child open a savings account online or at your local bank. Online savings accounts can have higher interest rates and lower fees, but brick-and-mortar banks offer a hands-on experience. Determine which would be most helpful for your child before opening an account with them. In most instances, children cannot open their own account until they are 18, but most banks will allow you to open a joint account, a minor account, or a custodial account for your child.
Teach Them Patience with a CD
Now that they understand the basics of savings and building interest, open a Certificate of Deposit account with a higher interest rate. The time requirements placed on these accounts, along with the higher interest rates, can help your child better learn the time value of money. Since they won’t be touching the account often, an online bank with higher interest rates could be a good way to go.
2. Move Up to Investing
In most cases, individuals need to be 18 or 21—depending on where you live—in order to open their own investment accounts. Before that, they’ll need what is called a custodial account. You’ll open the account with your child and be the custodian of the account. Once they reach legal age, your child can take over the account themselves.
Before you get started investing, go over some basics.
- Investing means putting your money into something that you believe will grow in value. That can include buying a collector’s edition toy that might be worth more in a few years. It also includes buying stocks or investing in a money market account.
- You don’t always make money when you invest. There is some risk involved because no one knows what the future will hold. Some types of investments are riskier than others.
- Diversify when you invest. Explain the importance of diversifying your investments to mitigate your risks. That way, if one investment doesn’t work out well, you didn’t lose all your money.
Open a Roth IRA
If your child has taxable income from a job, they can start contributing to a custodial IRA. This can be a Traditional or Roth IRA, but Roth IRAs offer some specific advantages for teenagers. Roth IRAs are taxed at their current tax rate—which is likely much lower now than it will be when they are ready to remove the funds. Since they are paying (lower) taxes now, they can get the funds tax-free once they are ready to retire.
This type of investing may feel boring, but explain how they can potentially see big returns on their investments by the time they are ready to retire. Even if they don’t understand the value now, they’ll appreciate it when they’re older.
Let Them Experiment with Microinvesting
Once your child is ready to move on to more complex lessons about saving and investing, consider investment accounts for kids through apps or microinvesting options. Many options require users to be 18, but some—such as Acorns Early—offer custodial account options that you can set up and help your child run until they’re legally able to control the account on their own. These microinvesting accounts allow young investors to invest their spare change and learn the basics of investing quickly and easily.
Teach Them to Invest in Stocks and Mutual Funds
You can also set up a custodial brokerage account and start investing in stocks and mutual funds with your child. You’ll need to do the actual investing and trading, but your child will get control of the account once they turn 18 or 21 and should be involved in the process now so they understand how to manage it once it is theirs. If you already have a brokerage account, talk to your advisor about opening a custodial account for your child as well. Where possible, choose an account that allows your child to be hands on so they can learn how to manage the account themselves later.
Tools for Teaching Money Management to Children
Teaching your kids to invest is a smart part of money management for children. Helping them learn how to save now better sets them up for financial success in the future.
Investing isn’t the only important strategy for financial success, though! Teach your child about the importance of building and protecting their credit score, as well. If they’re 18, they can get their free credit score with a Credit.com account.
Note: Investing involves risk and can have tax implications. Consult with a financial advisor before opening an investment account for yourself or your child.
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