Warren Buffett was just 11 when he bought his first stock, so it’s never too early to start investing. But even if you’re not trying to raise a tycoon, getting your kids excited about investing when they’re young can pay off big in the future.
Turning off “SpongeBob” and making them watch CNBC instead probably won’t generate the enthusiasm you’re hoping for. But if you approach investing by making it fun, you’ll set them up for success later on.
5 Clever Ways to Teach Your Kids the Power of Investing
If you want to teach your kids the basics of investing for beginners, the best way to do it is by giving them a stake. Here are five clever ways to get started.
1. Let Them Invest in a Company They Love With Fractional Shares
Say your kid loves Disney, Netflix, McDonald’s or Nike. You can teach them about stocks by making them an investor in their favorite company. Of course, buying entire shares can get expensive.
But fractional shares make it easy to invest small amounts of money. You can invest as little as $1, depending on the brokerage, and get a corresponding fraction of a share. For example, as of this writing, a single share of Disney was trading for around $188. With fractional shares, you can invest $20 and get a little more than 1/10 of a share. You could give them a fractional share and then challenge them to add some of their allowance money each month.
To do this, you’ll need to open a custodial account through a brokerage. Your child will own the assets, but you’ll control the investments until your child is 18 to 21, depending on your state. Be sure to confirm beforehand that the brokerage allows for fractional investing, as not all of them do. Also, look for an account that offers commission-free trades. When you’re investing small amounts, fees can quickly erode your returns.
2. Match Their Roth IRA Contributions
If your child earns income by working, they’re eligible to fund a custodial Roth IRA. They could qualify if they have a part-time job or earn money babysitting or doing odd jobs. (Be careful in the latter two scenarios. They could also be on the hook for self-employment taxes.)
But let’s be honest: Your kid probably won’t be thrilled with the idea of throwing money from a low-paying job into a retirement account.
You could sweeten the deal by matching their contributions. The Roth IRA contribution limits are the same for kids and adults: Anyone under 50 can contribute up to $6,000 or the amount they earned for the year — whichever is less. So if your child earns $4,000 working, $4,000 is their maximum contribution. If they chose to contribute $500 and you matched it, they’d still safely be within the limits.
3. Get Them Involved in Their 529 Plan
Opening a 529 plan for your child is a smart way to save for college. But if you get your child involved with their college savings plan, they’ll learn the time and discipline that it takes to reach a big investing goal.
If you have a 529 plan for your child, make it clear that contributing to it is a shared responsibility. For example, you could require that they set aside 15% of their allowance or job money for their education and then let them spend the rest however they choose. Be sure to check in with them at least once a year on how much they have in their account. By talking regularly about college savings, you can also establish realistic expectations about what you’re able to afford.
4. Make a Game of It Using a Stock Market Simulator
If you aren’t ready to teach your kids to invest using real money, you could make a game out of it. Stock market simulators like Wall Street Survivor and HowTheMarketWorks let you invest an imaginary portfolio of money. You could have every member of the family create their own portfolio and make it a competition. Then you can talk about why certain stocks performed well while others flopped.
5. Get Them Involved in Your Other Financial Goals
Note that investing on your kids’ behalf is only something you should do if your finances are already in good shape. That means you have an emergency fund, your debt is manageable and you’re contributing to your own retirement account.
If your focus right now is on paying off debt or building your savings, get your kids on board. Using a debt-free coloring chart or a similar savings chart can get the entire family excited about your goal because you can visualize your progress. Your kids will be able to see how small sacrifices add up over time.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].