One of the best ways to build wealth over time is to invest — and starting at a young age can improve success down the road. However, even though 49 percent of children have a savings account, only 6 percent have an investment account, according to a 2020 survey from T. Rowe Price.
If you want to set your child up for future success, helping them learn about investing can be a good step forward. Even if you don’t know much about the subject, you can still teach kids the basics of investing, and maybe even learn a little along the way.
Start with saving and how to manage money
Before you tackle investing with your children, it’s a good idea to start with basic financial concepts like saving and spending.
“Even toddlers can understand the concept of a budget,” says Moana Whipple, a financial associate with Natural Bridges Financial Advisors.
Whipple and her partner started teaching their three-year-old about budgeting by giving her a YouTube video allowance, using a whiteboard to illustrate. Each time she watched a video, they marked off a box on the whiteboard.
“She quickly grasped that if she watched four videos before naptime, she only had one left for the rest of the day,” Whipple says.
Once children understand this concept, you can layer in additional age-appropriate money management concepts.
“Introduce banking and savings accounts to kids as they grow, so they learn where to hold their money easier,” suggests Robert Farrington, MBA, the founder of financial education website The College Investor. “There are many products and services designed to help tweens and teens that allow for debit cards and money management help, with parental controls.”
Explain the basics of investing
Once kids have a handle on basic money management, it’s probably a good time to help them learn about investing and show them how it works.
To start, begin with the basics of investing, including explaining that a stock — or share of a company — allows them to have ownership in that company. If you have an investment portfolio, show your child how it’s grown over the years through compounding returns.
Whipple suggests using toys as an example of watching out for trendy investments that might not have staying power.
“Kids know what it’s like to get caught up in the hype of a new toy, like beyblades, that doesn’t last,” Whipple says. “Relating it to toys and fads makes the idea more tangible.”
On top of that, gifting stocks can let them make some of their own choices and mistakes along the way. Websites like Stockpile make it easy to give fractional shares to children, once you set up a custodial account.
Farrington points out that his parents opened an account for him when he was a baby and gave him access to some investing choices and portfolio tracking tools as he got into high school. Even starting with $100 can be a good way to learn how to grow wealth, he says.
Open an account
One of the best ways to get children started is to open an account on their behalf. While minors can’t have their own accounts, Farrington points out, it’s possible for you to open a custodial account. Stash, Stockpile and Acorns all allow you to save on behalf of your child, and Wealthfront even offers the ability to save for college using a 529 plan.
Whipple suggests opening a custodial Roth IRA allowing kids to invest early on — with tax benefits.
“If your child has earned income from babysitting or some other job, they can contribute to a Roth IRA, up to the amount earned,” Whipple says. “This is an ideal [type of] account for kids investing since the earnings grow tax-free and the account can be tapped early for things like a first home purchase.”
In order to open an account, you’ll need your own information, including your Social Security number, as well as your child’s legal name and Social Security number. Whipple points out that the custodial account reverts to the child when they reach the age of majority in the applicable state, usually at age 18 or 21. Once that happens, the money becomes theirs to control.
Continuing the investing lesson: How to keep kids engaged
Teaching kids about investing shouldn’t stop once an account is open. Farrington says there should be an ongoing dialogue about the child’s investments, including discussions about losses, gains and mistakes.
It’s also possible to use stock simulators and other tools to try out different scenarios. However, the best lessons are about consistency and how money multiples, Whipple says. Letting kids see how money makes more money can get them hooked on investing and teach them the importance of developing the habit of investing early on.
The earlier you can get your kids investing, the more likely they are to develop better financial habits and build wealth over time.
“You might be surprised at how much kids can understand, especially if you layer different strategies starting at a young age,” Farrington says. “Don’t wait to help them start building a nest egg. They’ll appreciate it later.”
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.