Teaching Children the Basics of Investing
Learning finance may be as important for your children as reading, writing and arithmetic, but they might not learn it in school. So here are some tips on how to teach your children about finance and investing from an early age.
Get started early. Parents should introduce children to investing "as early as possible," according to Curtis Chambers, founder and managing member of the Chambers Financial Group in Clearwater, Fla.
Darrell Canby, president of Canby Financial Advisors in Farmington, Mass., says that "those who learn to handle their finances responsibly as children are more likely to handle their finances responsibly as adults."
Take it one step at a time. Canby says that a child's financial education begins with an allowance. He suggests parents start giving an allowance when a child is old enough to understand the concept of money, but young enough to accept their parents' guidance in spending it.
"Children should learn at an early age that there are three things, and only three things, they can do with their money - spend it, save it or give it away," he says.
Canby suggests that parents should set financial guidelines for children: short and long-term goals, as well as having pocket money.
Apart from setting guidelines, Canby says parents should be hands-off with how children spend their allowance. "Splurging on inappropriate items is part of the learning process. Your children are likely to learn best from their financial mistakes."
Learning to invest. Now that your children have some money saved up and a basic grasp of what money is, it's time to start learning about investing.
Parents can pay a discount broker to buy a small amount of stock of their choice, or open an account in their child's name in a mutual fund, according to Canby. "It's important to remember, however, that parental guidance is needed when investing in the stock market," Canby says. "Under some state laws, minors can own securities but the parent must execute trades."
What to invest in. Chris McLean of Charlottesville, Va., principal client strategist at wealth management firm Signature, recommends that children invest in individual equities as opposed to mutual funds.
"It's more interesting for children to learn this way," says McLean. "They can select a company/product that intrigues them and then follow its progress."
Jay Ferrara, investment manager and economic strategist for Farmers and Merchants Trust Company, says that children are more likely to be interested in investing in companies they are familiar with.
Chambers says that buying stock in Disney is a perfect place for your child to start because it is a blue chip stock. Blue chip stocks are the stock of a well-established and financially sound company, typically a safe investment.
Using the right tools. McLean suggests using a discount brokerage firm such as Schwab, E-Trade or Ameritrade to have your child manage his or her investments.
"The online platform is usually the best route, which will allow parents to also have access and supervise," McLean says. "It's also a very cost-effective way for a child to start."