I'm living so far beyond my income that we may almost be said to be living apart.
- e e cummings
|Show Kids How Money Earns Money
- Take time to show kids how their money earns interest.
- Find a bank that caters to kids.
- Help children invest in companies they're familiar with.
- With your kids, explore web sites about investing.
The time will come when the kids in your life will be old enough to earn their first income - whether it be from a lemonade stand, paper route or summer job.
The first two articles of our "kids and money" series examined ways to help children become wise savers and spenders. This final article looks at introducing kids to the idea that money saved and invested - in a bank or in the stock market - can earn more money, to supplement their income. Hopefully, this will help them avoid the fate of poet e e cummings when they grow up!
Sparking Interest in Interest
There's a scene in the movie Mary Poppins where young Michael Banks refuses to give up his tuppence to the bank manager, provoking general chaos and a run on the bank. Obviously, the world's greatest nanny hadn't done a very good job of explaining interest to her charge.
Kids often see things differently from grown-ups, and it's a good idea to give them visual aids or hands-on experience to illustrate how interest works. For a younger child, you might try putting two jars in a visible spot. Put the child's savings in one, and periodically add "interest" to the other one. That way the child sees her money earning money.
For an older child, seeing interest adding up on a bank statement might do the trick. You could occasionally give him the cash equivalent of the interest earned, for spending. Explain that the original money is still in the bank, tucked away for the future, and that this is extra.
Your bank may offer special conditions for children's savings accounts, such as a low initial deposit. You might want to check on this before you take your child in to open an account.
Banks "for kids only" also exist. The Young Americans Bank in Denver offers banking services to anyone under 22. A savings account can be started with a $10 minimum deposit, and the bank also offers CDs, checking accounts, and credit cards (with parental permission required for those under 18). If you don't live in Denver, you may bank by mail. The bank's web site has educational materials too.
An online bank, "Doughnet," caters to youngsters ages 13-18. It offers online banking and investing, and educational materials. The "budget" section shows kids how to work out whether they are overspending. Good thing, too - this site also has links to online shopping, and purchases can be made (surprise!) from the child's online account.
Stocks for Tots (and Teens)
Once children understand the concept of interest, they may want to raise the stakes. They may be ready for investing in stocks.
Some mutual fund companies offer funds geared toward youngsters, featuring companies familiar to kids and low initial investment requirements.
Alternatively, your child may want to choose individual stocks in companies whose products he knows and likes.
Children under age 18 can invest in stocks or mutual funds through custodial accounts. You should remember that once children turn 14, their unearned income over $650 is subject to tax (the "kiddie tax"). To keep the unearned income down, you might want to steer them toward stocks that pay low dividends, and mutual funds that don't pay dividends.
Of course, this means they will need to understand the concept of capital appreciation, as opposed to income.
The Web's the Place
A wide array of web sites caters to pre-teens and teens interested in investing their money. Wise parents will look at the sites first, or along with their children, to monitor the information they are getting and answer questions as they come up.
Good places to start are the Mutual Fund Education Alliance, which has pointers on investing for and by children, and the National Association of Investment Clubs, which has an online site for youth, with information about starting investing clubs.
Another site, Investing for Kids, bills itself as having been set up by high school kids for other kids. It features lessons and games about investing, and biographies of the students who set it up. However, this writer found that the message boards contain a lot of get-rich-quick schemes, and should be approached with caution. (This might be a good occasion to explain to your child that if something sounds too good to be true, it probably is.)
Links to web sites mentioned in this article:
Young Americans Bank
National Association of Investment Clubs
Investing for Kids