Understanding how to invest is one of the best things you can teach your kids, but find an approach that your comfortable with.
By: Allan R Kirby
It’s a little work and takes some time, but I think it’s important to teach kids about investing and is often something that is overlooked. I wish I had learned more because understanding investing will not only allow kids to have the knowledge and tools to be successful with their finances but they will also have a lot more confidence when they get older. But what are the approaches to take? and is it difficult to do?.
First I am going to explain a couple of approaches which I came up with based on my own experience and from what others have said has worked best for them. Secondly remember kids are kids and its sometimes investing is not a subject they will all be interested in. Third, you can agree to disagree, but I believe kids need to learn more about the mechanics of investing more than the return itself. Teaching kids is just that, teaching them that its Ok to make mistakes and to learn from those mistakes
“One key lesson I learned from my own kids is that they are much more engaged when we are dealing with real money.”
Saving's Accounts & Guaranteed Certificates
Now for parents who want to keep things simple then just having a kids savings account (high interest account if possible), or maybe invest in some guaranteed deposits such as CD’s is a great starting point. While the emphasis is likely more on learning how to save and manage money, putting money into a savings account/guaranteed deposits is low risk and does help your kids understand how to build their equity up while also getting a small return. I did this myself and it was a perfect way for my kids to learn about banking and how accounts worked and because it was a high interest account, they did get interest every month, not a lot but enough to show them how their money was growing with no effort at all. I understand this is not for everyone but it’s a good start and not complicated, it’s just a matter of setting up a kids account at a bank, and most banks do have accounts specific to kids and young adults.
Investing safely, ETF's or Mutual Funds
Teaching kids to learn how to save and grow their money is a very good start, however as your kids get older you may want place more emphasis on investing. For most parents, I would suggest simple investments, nothing complex or high cost, just low cost ETF’s that mimic the broader markets such as the S&P 500, Dow and Nasdaq or it could be higher cost mutual funds. Regardless of what type of investments you consider, teaching kids more about ETF’s will allow them to develop a better understanding on how to build wealth. Of course you do not have to limit yourself to broader market ETF’s, it’s up to you, so feel free to mix it up and add some risk and diversification by having your children invest in more industry specific ETF’s.
“What type of ETF's is up to you, just ensure you do not buy highly volatile ones.”
Generally I think ETF investing is a great tool for teaching kids when they are a little older, it’s something I would not have tried when my kids where eight years old. Secondly, I have seen many articles that emphasize the need to keep investments tied to the broader markets and to avoid industry specific or high volatile ETF’s (held for only a few days), I do agree that high volatile ETF’s should be avoided, I do not want to teach my kids about daily trading but I will add specific industry ETF’s to my kids investments for diversification within an industry, such as Technology. Overall ETF’s are a great tool and will help kids Learn:
1. How save money to invest.
2. How investing works.
3. The basics of risks and returns.
4. The basics of diversification.
Investing in ETF's and Stocks
For the more enterprising parents, having kids learn invest in stocks as well as ETF’s can help them get a much deeper understanding of the securities market, some of the benefits include:
1. Become more engaged with their investment.
2. Learn how stocks work (IPO’s valuations, movement in price, analyst opinions).
3. Understanding DRIP's (Dividend reinvestment plan) work .
4. Learn more about the correlation between bonds and stocks.
5. Risks involved with owning stocks.
6. Understand more about diversification.
Look let’s be clear, I am not talking about trying to get a trading account for kids, I am talking more about buying the stocks and holding them in an account until they are old enough to own them. Secondly I would not bet all their money in this adventure, just a small amount. I also understand that stock trading will mean higher costs and greater risk while having less diversification, but I believe getting a better understanding of the mechanics behind the markets allows kids to better judge how they should invest later in life, plus they can end up being much more comfortable talking to financial institutions about investing when they need to. As for myself, I did buy stocks for my kids, but to my surprise their level of interest went way up when I purchased stocks for them, today they are much more involved. When I purchased stocks I gave my kids the options on which stocks to pick. I did not want penny stocks nor high priced, they had to be reasonably priced, good securities. I did help them out a little but with the stocks invested being less than $200 I am not concerned with the choices they made, its more about the engagement and learning.
“When it comes to Stocks, keep the amounts small and focus on engagement and learning, not the fees.”
Final Thoughts
Ultimately it’s up to you to determine the level of engagement and what you are most comfortable with, the more you engage, the more they learn. For the vast majority of parents I would suggested the first option and possibly the second and leave specific stock picking to people who are comfortable with stock trading. Remember the focus is on teaching but even I am often reminded at times that it can be difficult to teach investing, kids have so many other things on their mind. I have had to learn how to adjust and take a much slower measured approach. In the end, teaching your kids about investing will help them have the tools necessary to succeed later in life and is one of the best things you can teach your kids.
Budget Planner is a segment of the MySmallBank.com blog written by Allan R Kirby, who writes and produces Personal Finance articles and videos along with My Success Magazine.
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