Do you realize that children today know very little about money? They don’t typically earn it themselves and they have no clue how hard one has to work in order to save money for the future. However, children that are given the opportunity to learn the value of the dollar often far exceed the average individual when it comes to successes in life.
One of my most favorite stories to read is that of Warren Buffett. His dad worked within the stock market industry and taught Warren at a very young age the value of a dollar. Little Warren was introduced to the stock market when he was just eight years old.
That first stock purchase began an unprecedented streak of investments for Warren. His money was multiplying in the market, but he wanted to start other businesses. This lead to his pinball machine business in the local barbershop before he was a teenager, and then he decided to purchase a large amount of land to rent out to the local farmers. Warren Buffet has obviously been a success.
Give your child the same chance.
Start Your Child Young
One of the worst things you can do for your children is give them everything. If you provide for every one of their needs and wants until they graduate from college, they will most likely fall flat on their face when they graduate, and it’s not their fault, it’s yours.
The first step to giving the gift of investments is to allow them to earn their own money. Give them extra things to do around the house, encourage them to set a lemonade stand in the front yard, or let them go to neighbors to work odd jobs around their house. Once they have earned the money themselves, they will be a little more excited to invest.
When your child earns a few dollars, begin teaching them that their dollars can grow if they are properly invested. I once heard of a parent giving their child the option to spend a portion of the dollars that they earned or they could give the money back to their parents and receive double the amount by the end of the month. Of course many investments won’t pay out 100% in one month, but it allows your child to experience some delayed gratification as well as an investment scenario.
Get Them Interested
Once they grow a little older, encourage them to invest their money into the real market. Don’t just pick the best investments for them, let them choose a company that they have an interest in.
For instance, if they love to play a certain type of video game, ask them who makes it and look up the company online. If you feel comfortable with the financials you see, let your son or daughter make that stock purchase. Sure, index funds might be a better option than individual stock investing, but who has ever gotten excited about index funds? Based on my count, zero.
Invest for Them Also
Without teaching your children about money management and investing for their future, investing money for them will only ruin their chances at financial freedom. But, if you take the steps above and invest some money for their future, then they are almost certain to succeed financially. In the future, your family name may be synonymous with the names Buffett and Rockefeller.
While they are young, begin putting money away into a Roth IRA (to avoid tax when they begin cashing in the fund at an old age) if possible. It would also be wise to invest into a 529 plan for their college future (since the price of education is skyrocketing). With these simple steps, your child will be on the fast track to a better life, just like you’ve always wanted for them.
Helping Others Invest for Them
Chances are, you may also have family members, such as grandparents, that will want to start an investment fund for them. This can be a great asset for them later in life, but it’s important that you do it right.
In many cases, grandparents may just want to open a savings account or brokerage account in your baby’s name. They may not realize all of the current tax implications and future scholarship and financial aid implications of doing this. That’s why you need to help them!
Make sure that you set up guidelines for them, such as what types of education savings accounts you’re looking at for your children. Having them contribute to an education savings account can be a smart move.
If they want to give investments directly to your child, you’ll likely need to do it through a UGMA account, or Uniform Gift to Minors Act account. This will make you, the parent, a trustee for your child’s money until they are of age (typically 18 years old).
Finally, if there is a large sum of money that someone wants to give your child, a trust may be the way to go. A trust can be set up with certain rules that can help your child manage their money later in life. However, remember that a trust can be expensive to set up.
Types of Investments for Baby
No matter what type of account you’re looking at opening for your child, you’ll still need to decide on investments for them. Given that these will be extremely long-term investments — they won’t even touch the money for 10 to 15 years at minimum — you’ll typically want to invest in broad market index funds.
Good choices include the S&P 500, such as SPY, or even dividend-paying stocks like DVY.
Keeping it simple, but staying in an index fund, will be a smart move for the long-term.
Do you have investment accounts set up for your children? Did any grandparents or other relatives open accounts for them? What did you do?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.