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Q&A: How to Get Young Children to Invest

Surprise, you can actually save too much in a 529 Plan.

Question: We have two children in elementary school. We manage our money responsibly and are trying to teach our kids that it’s important for them to have money to spend, some to save, and some to donate to church and charities. Now I’d like to take another step. How do we teach our kids about investing without doing it for them?

Obviously they don’t have jobs, so they don’t have a savings plan through a company. How do we get them to invest money on a regular basis?

Ric: That’s a great question. The first thing I would say is that you don’t get your kids to do it: You simply tell them they have to do it. You’ve already established a basic tenet with them — that you don’t get to spend all the money that you have. As adults we know it isn’t our gross income that matters but rather our net income, and that needs to be imparted to children.

Kids who are old enough can earn money through babysitting, mowing lawns and other chores, but even if they’re too young for that they probably receive an allowance from you and occasional monetary gifts from grandparents and others on birthdays and holidays.

They should understand that when they receive money — regardless of the source — they don’t get to spend 100% of it as they wish.

The first thing you should do is withhold 20% of all money they receive for taxes. You might say something such as, “Great, your grandmother just gave you $20, and I’m taking $4 of it for taxes.” Kids need to understand the reality of taxes. Meanwhile, you set the $4 aside; just say it helps pay for the house, food, clothing, utilities and cable TV. Explain that “the same happens when taxes are withheld from your paycheck; the government uses the money to pay for roads, hospitals, the military, education and other civic purposes.”

Then put the $4 in a stock ETF—and don’t tell your kids what you’re doing. And just keep on doing it this way, so by the time they turn 16 and want to buy a car, you can present them with this account. Of course, let’s hope the account will have done well in all that time (and you’ll have demonstrated the value of both delayed gratification and long-term compound growth through investing), and you will be an instant hero!  But if not, it’ll be a great opportunity to teach them how to manage their account, so they can start to learn how the market works.

Second, as you pointed out, is to help them recognize that not everybody is as fortunate as they are. Hence comes the obligation to serve others. Help them get involved in charitable activity. It could be something they see on the news, such as helping victims of a natural disaster. Maybe they want to help save abandoned pets or assist homeless children, or perhaps they have a friend at school who suffers from a life-threatening disease and they want to support related medical research. Encourage them to donate a portion of their money to a good cause or charity.

Third, let them enjoy a portion of the money that’s left, spending it on whatever they want (subject to your approval) — buying candy, video games, comic books, whatever helps them recognize that having money brings pleasure. This helps children develop a healthy attitude toward money.

But they shouldn’t be able to spend freely with 100% of their net income; instead, they should recognize the importance of saving for a long-term goal — an expensive item that they can’t afford to buy with the couple of bucks in their pocket. A big purchase could be a bicycle, an iPad, a car or even college. Help them see the value of saving for a longer-term goal — which leads to your original point about investing. Explain to them that money saved for a long-term goal shouldn’t be placed into a bank account, money market or CD. Rather, teach them the power of compound growth.

Show your kids my book The Truth About Money; Part I explains compound growth and how best to achieve it. This sets the stage for showing them how to invest in stocks: Simply ask them to pick a company they like. They might choose Mattel, Sony or some other company that manufactures a product they like. Then open a discount brokerage account for them at a firm such as TD Ameritrade (you’ll have to open a custodial account for them because they are minors). Then show them how the account works, how to access it online and how to track the stock. Soon they’ll discover the nature of volatility and how the market really works.

Together these steps are a great way to teach children financial responsibility.

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