Investing for Kids and Teens

Money SmartsYouth & MoneyJuly 27, 2023

Investing is a vital financial skill often overlooked in traditional education, but it's critical for kids and teens to grasp. It not only helps them understand the value of money and enhances their financial literacy but also teaches about risk, rewards, patience, and long-term planning. This guide aims to provide a comprehensive overview of the basics of investing, suitable investment accounts, and ways to make investing fun for younger minds. By starting early, we can set our kids on a path to financial security and prosperity.

4 Key Takeaways:

1. Early Financial Education: Teaching investing to kids and teens enhances their financial literacy and long-term planning skills.
2. The Basics of Investing: Understanding investing basics helps young people make informed decisions about their money.
3. Investment Accounts for Minors: Various investment accounts suitable for minors exist, each with its own benefits and considerations.
4. Making Investing Fun: Games and relatable examples can make the learning process enjoyable, fostering a positive attitude towards investing.

What Kids and Teens Learn from Investing

Investing is a vital financial skill that is not often taught in traditional school curriculums. When children and teenagers are exposed to investing early on, they can learn several important lessons that will serve them throughout their lives:

• Understanding Money and Value: Investing helps kids and teens to understand the value of money. They start to appreciate the power of compounding and how invested money can grow over time. They learn that money is not just for spending but can also be used to create more wealth.
• Financial Literacy: Investing at an early age promotes financial literacy. Kids and teens learn about interest rates, stocks, bonds, mutual funds, and more. This helps them make informed financial decisions in the future.
• Risk and Reward: Investing involves both risks and rewards. This encourages kids and teens to learn about balancing risk against potential returns. They also understand that not all investments will be successful, which teaches them about loss and resilience.
• Patience and Long-term Planning: Unlike instant gratification, investing requires patience and forward-thinking. Young investors learn the importance of setting long-term goals and making decisions that will benefit them in the future.
• Economic Awareness: As they follow their investments, kids and teens will naturally become more aware of economic trends, business news, and market conditions. This will help them to make sense of the world's financial landscape and make informed investment decisions.
• Decision-making and Research Skills: Kids and teens will learn to research potential investment opportunities and make informed decisions based on their findings. This can be a valuable skill in many areas of life beyond investing.

These learning opportunities provide kids and teens with practical experience and knowledge that can set the foundation for a financially secure future.

Start with the Basics

Investing involves putting money into various types of assets with the goal of generating a return or profit. Here are some fundamental concepts that are important for beginners to understand:

• Risk and Return: Investing inherently involves some level of risk. Generally, the higher the potential return, the higher the risk. It's important to understand this trade-off and choose investments that align with one's risk tolerance.
• Compound Interest: Compound interest is when the interest earned on an investment is reinvested, and then interest is earned on that reinvested amount as well. Over time, this can result in significant growth in the value of an investment.
• Diversification: This involves spreading investments across a variety of different assets to reduce risk. If one investment performs poorly, others may perform well, which can balance out the overall return.
• Investment Types: There are many different types of investments, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and more. Each comes with its own risk and reward profile.
• Buy and Hold Strategy: This is a long-term investment strategy where an investor buys stocks (or other types of investments) and holds them for a long period regardless of fluctuations in the market.
• Dollar-Cost Averaging: This investment strategy involves regularly investing a fixed amount of money in a specific asset, regardless of its price. Over time, this can reduce the impact of market volatility on the investment.

Teaching kids and teens these basics of investing can equip them with the knowledge they need to start investing and lay the foundation for financial success later in life.

7 Investment Accounts for Kids and Teens

1. Custodial Accounts (UGMA/UTMA): Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow parents or other adults to manage assets on behalf of a minor. The minor gains control of the account when they reach the age of majority (usually 18 or 21, depending on the state).
   
   
2. Roth IRA for Minors: If a teen has earned income, they can contribute to a Roth IRA. The advantage of a Roth IRA is that earnings grow tax-free, and withdrawals in retirement are also tax-free.
   
   
3. 529 College Savings Plans: These are tax-advantaged savings plans designed to encourage saving for future education costs. While these funds are typically used for higher education, they can also be used for K-12 education expenses in some cases.
   
   
4. Coverdell Education Savings Account (ESA): A Coverdell ESA is another type of tax-advantaged account for educational expenses, although it has lower contribution limits than a 529 plan.
   
   
5. Brokerage Accounts for Minors: Some brokerage firms offer accounts for minors where they can buy and sell investments under the supervision of an adult.
   
   
6. High-Yield Savings Accounts: While not technically an investment account, a high-yield savings account can be a good place for kids and teens to start saving money and earning interest.
   
   
7. Prepaid Tuition Plans: These are a type of 529 plan where you pay for future tuition at today's prices. This can be a good option if you're concerned about rising tuition costs.

Each of these accounts has its own advantages and limitations, and the best choice will depend on the individual circumstances and goals of the child or teen. Always be sure to do your research and consider consulting with a financial advisor before opening any investment account.

How to Make Investing Fun for Kids

Introducing kids to investing can be a fun and engaging activity. Here are some strategies to make the process exciting and enjoyable:

• Make it a Game: Use games to teach the basics of investing. Games like "Monopoly" and "The Game of Life" can provide practical lessons about money and investing. Online simulations and apps, like Stock Market Game or Wall Street Survivor, can also provide a hands-on experience with investing in a risk-free environment.
• Involve Them in Real-Life Investing Decisions: If you're comfortable, share your own investment decisions with your children. Discuss why you chose a certain stock or fund, and track its progress together. Let them suggest a stock and consider adding a small amount to your portfolio.
• Create Competitions: If you have more than one child interested in investing, consider making a friendly competition. Each child could choose a stock they believe will perform well, and you can track the performance together over time.
• Invest in What They Know: Encourage your kids to think about companies they are familiar with, like their favorite toy manufacturer or fast-food chain. This can make the process more relatable and exciting for them.
• Set Goals: Help them set financial goals, like saving for a new video game or a college fund, and show them how investing can help achieve those goals faster.
• Use Visual Aids: Graphs and charts can make the abstract concept of investing more tangible. There are many online resources and apps that provide visual representations of financial data and can help children see how their investments are doing.
• Reward Learning: Acknowledge and reward your kids when they learn something new about investing or make smart financial decisions. This will motivate them to continue learning and investing wisely.

Making investing fun can help kids develop a positive attitude towards money and investing, which can serve them well into adulthood.

Open a demo trading account

Opening up a demo trading account for your kid is a brilliant way to teach them the fundamentals of investing without risking any actual money. These accounts, offered by many online brokerages, simulate real trading experiences, providing an interactive platform for them to learn about different types of investments, how to make trades, and how to track investment performance over time.

This hands-on experience can be invaluable for a young person interested in investing. They get a chance to apply their learning in a risk-free environment, gaining insights into the stock market's behavior, understanding the impact of economic news on share prices, and learning how to react in volatile market situations. The practice gained through a demo trading account can build their confidence and set the foundation for future real-world investing. Remember to supervise and guide them through this process to ensure they make the most out of this educational opportunity.

Start with companies your kids know

A great way to get kids interested in investing is to start with companies they know and love. These could be brands whose products or services they use regularly, such as tech companies like Apple or Microsoft, clothing brands like Nike or Under Armour, or entertainment companies like Disney. This approach helps to make the concept of investing more tangible and relatable to them.

When kids invest in companies they're familiar with, they're more likely to understand the business models and keep up with the latest news and updates. This familiarity can motivate them to monitor their investments and understand how various factors influence a company's stock price. It also provides an opportunity for them to learn more about the sector that company operates in, the competition, and how they make money.

Remember, while starting with companies they know is a good way to pique their interest, it's also crucial to teach them the importance of diversification in investing. Over time, they should learn to invest in a mix of different types of companies and sectors to spread their risk and increase their potential for returns.

Investing in known companies is just the first step in the investment journey. As they grow older and gain more experience, they can gradually venture into other investment avenues like index funds, ETFs, and bonds.

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