Introducing My Kids to Investing

December 29, 2020  | By Kevin Smith

My kids are 3, 7, and 9. The first money concept I tried to teach them is that money does not fall from the sky, but Congress and the Federal Reserve keep proving me wrong. The older kids seem to grasp that you have to do something useful for someone else to earn money, and that is a pretty good start. I want to get them familiar with the idea of investing, but those concepts are a bit too abstract. You have to start somewhere! Here are a few ideas to help kids get familiar with investing.

Learning by doing is the most direct approach. There are platforms for trading fake accounts, which I have not tried, but I see the appeal. I want the kids to experience the real life effects of risk and return, and the best way to do that is with real money they have earned.

Open a Brokerage Account

Trading a live brokerage account with very small amounts has never been more accessible because stock trading fees have gone away, and it is now possible to by fractional shares. This makes investing possible with as little as $5.

For example, my son Jack saved up $28 and wants to invest it (he doesn’t really know what that means yet, but I like the enthusiasm). I explained a little bit about how companies work and how big companies are owned by millions people, who each own a little bit of the company, and if the company makes money, those people get a share of it. I asked him which company he thinks will make money and he chose Target. After all, it’s always busy there and they have a steady supply of awesome stuff, like Pokemon cards, nerf guns, and soccer balls. One share of Target currently costs $175, much more than Jack’s $28. With fractional share purchasing, he can buy 16% of one share and become an investor.

This is still a relatively new technology and will soon be available on all of the major custodial platforms. Charles Schwab recently added fractional shares, so I will probably wait until we are able to open accounts with them as a firm (coming soon!). Other custodians that offer this and have excellent user interfaces are CashApp and Robinhood. CashApp in particular is very user friendly for beginners and that would probably be my second choice.

I will keep you posted on our progress and share other ideas as we go.

Matching Funds

There is nothing that motivates saving more than seeing your savings grow. Going from $100 to $1,000 to $10,000 is exciting and people are wired to resist going backwards. Creating a matching plan creates an incentive to save and will help them experience growth faster. There is no right way to do this, but it should be enough to be meaningful.

If you have kids who are working and earning income, even part time, they will be eligible for Roth IRA deposits. A small Roth IRA of $5,000 at age 15 turns into $235k by age 65 without any additional deposits! (8% compound growth) You could do this with kids, grandkids, nieces and nephews. The nice thing about the Roth IRA is they are less likely to spend it early because of taxes and penalties.

Posted in: Investing
Kevin X. Smith, CFA
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Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More

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