You want your children to develop habits that will help them become successful adults. That's why you encourage them to clean their rooms, get good grades and learn to be responsible.
Thoughtful investing is an important habit to develop, as well. When it comes to investing, time in the market is essential—the earlier you get started, the better. So why not help your children or grandchildren master the basics? Opening up a financial dialogue early on could help establish a strong investing foundation for their future. Here are some tips to get started:
Ease into it. You don’t have to go into the nitty-gritty aspects of investing right away. Start off by explaining the purpose of investing—typically to meet long-term financial goals—and how it differs from saving. Use real-life scenarios to help them better understand the difference between short-term and long-term investing, and the power of compounding.
For example, let's say the child wants to buy a $400 video game console. If the goal is to acquire it as quickly as possible, the best course is probably to set aside the money in a stable, short-term account, such as a bank savings account. However, if that $400 were placed in investments that averaged a 6% return per year, it could grow to $535.29 over a five-year period.¹ Realistically, many kids would prefer to spend the money for short-term gratification, but it's worth getting them to think about the long-term alternatives and the possibilities that can develop.
Be inclusive. Having kids share in adult responsibilities can make them more receptive to finance and investing. You can bring them into the conversation by having them go through the thought process behind household expenses—like groceries, light bills or car repairs. You could also have your kids or grandkids sit with you as you review your own investments, and go over any questions they may have.
Try some hands-on learning. Another way to introduce and engage minors in investing is by letting them test the waters. Consider a gift of individual stock, perhaps in companies that create products the child enjoys. Similarly, you might gift shares in mutual funds or exchange-traded funds that invest in sectors that interest the child. Treasury bonds are another time-honored way to introduce minors to investing.
Consider a custodial account. While you can earmark money for a minor child in your own brokerage account, consider opening a separate custodial account under your state's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). With this account, both you and the child can monitor money that will become the child's at age 18 (or 21, in some states). This can be useful in letting children feel that they are managing their own money, while allowing for plenty of adult supervision. Note that any investment income generated in the account is considered the child's, and may be subject to income tax if it exceeds a certain level.²
¹Source: Investor.gov Compound Interest Calculator. The average return cited is for illustrative use only and not indicative of any investment available. Returns typically vary from year to year, including years where returns are negative. Investing involves risk including possible loss of principal.
²Check with your tax consultant or the IRS website for more information.
What You Can Do Next
The financial habits children learn now could affect their financial future. Make sure they’re equipped with the tools they'll need in adulthood.
- An online investment advisory service, like Schwab Intelligent Portfolios, may appeal to a member of the generally tech-savvy younger generation. It also can further the investing conversation by introducing concepts such as rebalancing and diversification.
- Take the initiative and start a financial conversation today.