Investing and Growing Your Money
Investing and growing money is an often overlooked area of financial literacy with kids. We tend to view investments and money growth as something that adults should do. We learn about our 401Ks, study the stock market and determine how to best diversify our investments. However, when it comes to our kids, we often just hand them their allowance or pay them for odd jobs around the house.
Many parents, in an effort to teach about investments and to prevent wasting money, open their child a savings account. Parents have the kids deposit any monetary gifts or a specific portion of their allowance. And, they get to earn interest so it’s a win-win situation, right? David Owen, in his book “The First National Bank of Dad”, has a different point of view. He says that a child’s perception of a savings account is like “a black hole that swallows birthday checks.” Here’s a wonderful excerpt from his book…
Kid: “Grandma gave me twenty-five dollars!”
Parent: “How nice. We’ll put that check straight into your savings account.”
Kid: “But she gave it to me! I want it!”
Parent: “Oh, it will still be yours. You just have to keep it in the bank so that it can grow.”
Kid (suspicious): “What do you mean ‘grow’?”
Parent: “Well, if you leave your twenty-five dollars in the bank for just one year, the bank will pay you fifty cents. And if you leave all of that in the bank for just one more year, the bank will give you another fifty cents, plus an extra penny besides. That’s called compound interest. It will help you go to college.”
The main problem with these schemes is that there’s nothing in them for the kids. College seems a thousand years away to young children—who, at this point, probably think they’d just as soon stay home, anyway—and the promised annual return wouldn’t cover even the cost of a pack of chewing gum. Most children immediately realize that banking plans implemented by their parents are actually punitive in intent: their true purpose is not to promote saving but to prevent consumption. Appalled by what their children spend on candy and video games—and also appalled, perhaps, by the degree to which their children’s profligacy seems to mimic their own—the parents devise stratagems for impounding excess resources. Owen, David (2007-04-24). First National Bank of Dad, The (pp. 4-5). Simon & Schuster. Kindle Edition.
Savings accounts and college accounts definitely serve a purpose --- to save for long term goals. I think it is a great idea to save for college and encourage all families to have long term plans. However, the concept of college to an 8 year old is too far removed from their everyday life to be meaningful. If our goal is to teach kids how to invest and grow their money, there are other opportunities that can get the kids actively involved in their investing.
Interest from Parents:
Parents can pay interest on the amount of money their child has in savings at the end of each month. This is the core concept in David Owen’s First National Bank of Dad. He simply used his Quicken program and added a “virtual account” for each of his kids. They could deposit their allowance or earnings into the Bank of Dad account. At the end of each month, he would add 5% interest to the amount in each account. He made the interest level high enough that it was enticing for his kids. They began to choose to save instead of choosing to spend. His approach engaged his kids in money management and made it meaningful to them.
Making this work for you: This is a highly flexible approach. You can determine the interest rate and the frequency of interest payments. Some families like to adopt an Annual Percentage Yield approach similar to the real banking industry. You can decide to include allowance payments or just pay interest on other money that the kids have earned. Keeping track of the balances and interest can be done with a simple ledger, a spreadsheet, a program like Quicken or a virtual family bank, like MoneyTrail.
Investing in Themselves:
This encourages a true entrepreneurial spirit. It seems that every kid wants to do a lemonade stand at some point. As they get older, encourage them to think beyond the lemonade stand. Do they have a particular talent or skill that they could use to make money? Enable them to use their own money to invest in their business. Help them develop a modified business plan and determine how much they will need to charge for their product or service to make a return on their investment. Your kids might gain money with their business or they might lose money. Either way, they will be learning a valuable lesson about investing in themselves.
Making this work for you: Biz at Bedtime has an excellent, free basic business plan template for kids. Sit down with them one evening, talk about some business ideas and help them work through the template to start their plan.
Investing in Outside Opportunities:
As kids get older and get into their teen years, investing in the stock market becomes a realistic opportunity for them. You can help them learn about the stock market, pick a few companies that they feel are promising and help them buy a few stocks. The teens can follow the stock’s performance and hopefully, grow their money.
Making this work for you: Introducing the stock market to a teen can be a very involved process. Fortunately there are many resources available to teach them about the stock market before they buy the stock. Check out my post, Using the Stock Market to Teach Teens about Investing.
The March Edition of Teaching Your Kids about Money will cover saving for short term goals. Subscribe by email or RSS feed at the top of this page so that you don't miss it!