Investing for Kids: Teaching Children the Importance of Money

Investing for Kids: Teaching Children the Importance of Money

Here are some of my top "Investing for Kids" tips. Here's how to teach kids the importance of money.

One of the best gifts a parent can give their kids is a financial education starting early on in life. Now you don't need to be reading them Rich Dad, Poor Dad as they drift off to sleep, but it certainly won't hurt for them to overhear financial podcasts, audio books, and radio shows playing in the background as they grow up. While they will glean bits and pieces from those, it's a good idea to teach them about money from a young age by giving some type of allowance or having them do extra chores to earn commissions.

Teaching the Basics of Money

To help them learn about saving, you can require that they set aside a percentage of any money they receive from commissions, allowances, or gifts to be divided into categories such as spending, saving, investing, giving.

  • Spending money is available to use right now
  • Saving is for a bigger ticket item like a doll house, bike, or car
  • Investing is put in an index fund or stock of a product they like and monitored monthly
  • Giving is to be used for a charity they support

Two ways that you can help kids learn about debt:

  1. Let them help you pay your bills. Most schools don't teach anything on personal finance, so it's a great idea to involve your kids in your finances. You can show them your bills each month and how you're paying down the mortgage or car loan. You'll find lots of teachable moments in having them help you.
  2. Let them borrow money from you. Learning about debt early on will help them see how quickly interest payments add up, especially when it comes to consumer debt like maxing out a credit card or buying more car than you can really afford. When your 12-year-old asks you to lend her money for a purchase, you can agree and write up a contract stating the amount, interest rate, and payment terms. It will be better for her to make a $30 or $300 mistake now than a $30,000 one an adult.

Real Estate Investing

Unless you have your own real estate investments, it might be challenging for some kids to understand this concept. Playing games like CASHFLOW for Kids and Monopoly can help get the idea across in a fun, tangible way.

Credit Cards

To help your child build credit, you can consider adding your older teen as an authorized user on one of your credit cards. You might allow them to use it for gas, picking up things at the grocery store, and buying school items. For anything that they buy that you expect them to pay for, make sure to collect the cash when it's time to pay the monthly bill. By allowing them to be on your card, you're taking the risk that a credit card company otherwise wouldn't want to take, but also you are allowing your child to start building their credit score off of yours.

Once you decided they're responsible enough to have their own card, they can apply for one. Have them pay off the balance each month. This keeps their credit score high and will help them as they move into adulthood. Auto insurance companies and landlords almost always run credit checks on prospective clients. Having a credit score in the upper 700s vs the low 600s could mean hundreds of dollars in savings on insurance premiums and the ability to rent better apartments.

Investing for Kids Using Custodial Accounts

Minors cannot enter into legal contracts with banks, so when investing in their name, you must use a type of custodial account. Here's a look at several of the options available and how you can use them:

Uniform Transfers to Minors Act (UTMA)

One way to transfer assets like money and real estate to minor children is through a Uniform Transfer to Minors Act, also known as an UTMA. This allows the assets to pass to the adult child without the need to set up a trust which can be complicated and expensive. Assets placed in the UTMA are controlled by the custodian while the child is still considered a minor. After their 21st birthday, the adult child has access to the assets and is free to do with them as they like.

This can be a great way to save or gift money to a child, while allowing them to have the benefit of assets they could not otherwise own, and while enjoying a lower tax rate. Rules about the UTMA vary by state, so check with your local investment professional to determine if this is a good way to investing for your kids' futures.

The drawbacks are that the adult child has unrestricted use of the money. Also, it could impact their ability to receive financial aid when they fill out the FAFSA for college.

Custodial IRA's

Another way in which parents can invest for kids who have jobs is to open a custodial IRA. This is available to kids who have earned income (paying for household chores doesn't count). So if your ten-year-old starts a lemonade stand and makes $300 over the summer, that's earned income. That money can be invested in an IRA for his future retirement. Now, getting him to agree to putting the money aside until he's 59 1/2 won't be easy to do. You as the parent can decide that you'll put $300 of your money into the IRA for him. That $300 invested in an index fund that averages 8% will earn him an extra $18,000 by the time he can make penalty-free withdrawals

Investing for College: 529 and ESA Plans

Yet another way of investing for kids' educational future is to make use of 529 college savings plans and the Coverdell Education Savings Accounts (ESA). Both allow you to invest money for your child's education; the ESA can even be used to fund education before college. There are differences as to how much you can invest each year, but you can invest in index and mutual funds of your choice. A major benefit is that the money must be used for education, not a wild Spring Break trip to Cancun!

One last thing, it's important to remember that once the child comes of age, the money is theirs. They can spend it as they please. If they want to spend it on a fancy car rather than a college education or starting a business, that's their choice. This makes it all the more essential to give kids a good financial education from when they're young, so they see the importance of being money smart.

Teaching Kids About Money with Rich Dad's CASHFLOW for Kids Board Game

When many people hear the terms "asset" and "liability" their mind quickly moves to more interesting thoughts. Imagine trying to explain these terms to your kids, along with income, expenses, and a whole assortment of other financial jargon. With the CASHFLOW for Kids game from the author of Rich Dad, Poor Dad your kids will soon be rattling off sophisticated terms and walking around pointing out assets and liabilities.

There are also a few online games on their site, Rich Kid Smart Kid Other fun games that teach about money and finance in fun ways are Monopoly (and a shorter Monopoly Deal card game), Payday, and Life. Even kids as young as 6 enjoy these and pick up bits and pieces of knowledge that will serve them well their whole life long.