Investing for Kids
The topic of investing for kids is popular for two reasons. First, parents believe it's important to teach their kids about the value of money. Second, children are often curious about money and investments. That's good news, because teaching kids how to invest is a lesson that will last them a lifetime.
Children learn the value of money very early in life. They learn this at a retail store, when a parent tells them that three pennies are not enough to buy a toy that costs $20. The interesting thing about kids is they are quick learners, and by the end of first grade many youngsters are good at recognizing, and even counting, money.
Anyone serious about teaching their child to invest should consider giving them a weekly allowance so money is a little more "real" to them. Some parents like to set up rules for an allowance. For example, a child may need to do chores to be eligible each week. That is an individual parenting decision.
In this article, the topic is teaching kids about investing. A good rule of thumb for a child's weekly allowance would be one dollar for each year of age, starting around the age of six. If an allowance is started before age six, the child may not understand the concept of money or its value.
Budgets for Kids
Once the child starts to receive a weekly allowance, the next step is to make sure they save some of the money. If a child is only six years old, that's pretty easy to do. They are probably more excited about the thought of saving money than spending it. But this love of saving will quickly change to the need to spend money. So at some point, a budget becomes a necessity.
Remember, the end game is to provide kids with enough guidance so they can start investing their own money. To make that a reality, they need to learn to save money first. A child's budget can be simple; after all they don't have to worry about a mortgage payment or utility bills. The best approach to a budget is to set aside a certain amount of the weekly allowance. The budget might be something like this: The child needs to save at least 25 to 50% of their weekly allowance each month.
Parents can ensure their kids save money by opening up a savings account at a local bank. Starting an allowance early in life will result in a sizable account balance fairly quickly. By the time they show some interest in investing, the child should have enough money in their bank account to start a small investment portfolio of their own.
Getting Kids Interested in Investments
The point of this exercise is to get a child interested in investing. Once a child shows interest, they need help managing their money (not their parents). Summarizing what's been discussed up to this point:
- The child has been provided with an age-appropriate weekly allowance.
- Guidelines had been set for monthly savings, using the simple concept of a budget.
- A bank account has been opened, so the child can watch their money grow, and start to understand the concept of a return on investment.
All that's left to do at this point is the waiting; because they now have a good foundation in money and its value. As the balance in their account starts to grow, it's possible to slowly introduce more complex investing concepts.
Learning comes naturally to children; unfortunately, the importance of a Fortune 500 company's capital structure is not something that comes naturally. Giving them money for their allowance may have been painful, but it was pretty simple to do. But as they journey down the investing road, someone is going to have to teach them more complex concepts, and some of the words they might hear or read.
We've put together an investing dictionary, but many of the terms found there might be inappropriate for younger children. The following is a short list of investing terms that provide a good foundation for a child, including links to their definitions:
- Earnings per Share
- Dividend Yield
- Income Statement
- Net Income
- Owner's Equity
- Price to Earnings Ratio
No doubt that kids love to play games and investing games are no exception. Before they invest real money in stocks, or while they are waiting for their bank accounts to grow, kids can play investing games. There are many websites that allow registered users to create "pretend" portfolios.
This topic has been thoroughly covered in our article on stock market games, which contains names of both board games as well as online websites offering simulations.
As a parent, it's important to pre-screen these sites, creating the account along with the child. Most websites consider investing an adult game, so it's important to make sure the advertising materials they are exposed to are age-appropriate.
When kids are ready to start investing their money in stocks, a parent can take one of two approaches. Anyone that's read articles on mutual funds before, will understand the standard warnings about market-wide risks, as well as those associated with the stocks of individual companies.
Individuals creating a portfolio of stocks will need around $35,000 to do this efficiently ($35 per share x 100 shares x 10 companies). Most kids will not have enough money to efficiently create a portfolio of stocks. So parents are really left with only two choices:
- Allow the child to create their own stock portfolios, even if it's inefficient. Since this is a lesson in investing, it might be a useful exercise to have them assemble a portfolio, even though they will be paying relatively expensive commissions and fees.
- Take advantage of the benefits associated with mutual funds. It is very likely the total returns for a fund will be higher than that of an inefficient portfolio. The child can still get involved in the mutual fund selection process, and they can follow the progress of some of the stocks in the fund's portfolio.
Having Fun with Kids
Finally, the most important lesson a parent can teach their kids is to have fun. Yes, investing is serious business. But if a parent takes all of the fun out of it, then the child is likely to resist getting involved, or staying involved, and that defeats the purpose of teaching them this important lesson. By making it fun, they are likely to think back on this lesson with a smile on their face; and have a positive association with this truly important lesson in life.
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