If you have children or grandchildren, or if you have a special relationship with your niece or nephew or the child of a dear friend, you can enrich their lives in many ways. One of the most important things you can teach is how to manage their money and invest for the future.
The Three-Jar Allowance
To learn how to manage money, children need some money to manage, typically from an allowance you provide and eventually from doing small jobs for friends and neighbors. As a first step, you’ll have to decide how much the allowance should be and whether it should be linked to jobs they are required to do.
As fair warning, both are matters of heated debate, so it’s worth doing some research and weighing what you’re comfortable with. For example, if you expect an older child to use some of the allowance for necessities, like clothing and school supplies, you may decide she needs a larger amount than if you’ll be paying those bills yourself. Whatever you decide, though, remember that the overall goal is to use the allowance as a way of teaching how to create a spending plan and live by it.
One popular suggestion, especially for younger children, is to illustrate the concept of budgeting by using three clear jars that represent current expenses, short-term savings, and long-term savings. Separating cash into jars makes it easy to compare the results of spending and saving. But don’t wait too long to open a savings account for their short-term savings and an investment account, such as a mutual fund, for their long-term account. Check with your bank or credit union about how to handle accounts for minors.
If you want to encourage charitable giving, you can use a fourth jar, set a fixed percentage of the total, such as 10%, and encourage putting money in that jar as well.
Spending V. Saving and Investing
To help children decide how much should go into spending and how much into saving, you can help them figure out how much they’ll need for regular weekly expenses, such as lunch money or whatever else you agree on. You might suggest keeping careful track of a week’s worth of spending and use that amount as a starting point. Part of the conversation should focus on the fact that budgeting always involves making adjustments. The goal isn’t to get it right the first time, but to come up with a workable allocation of money.
Next, talk about money for short-term savings goals. Children’s goals vary substantially, based on their age and concept of time, but might include toys, sports equipment, electronic devices, special clothes, or other big-ticket items. You may want to suggest saving for one item at a time and help them figure out how much they’ll need to save each week to reach their goal in a realistic amount of time. But you’ll probably want to let them discover for themselves that not all goals are worth the time and effort it takes to reach them.
Finally, be sure to encourage them to set aside a regular percentage for some long-term goal, however vaguely defined. For some children, saving for college means a lot. For others, the goal may be more tangible, like a car. Here, too, 10% of the total might be a reasonable percentage to save. As an incentive to put money into long-term savings, you might consider making a matching contribution by adding 50 cents or a dollar for every dollar your child puts in.
Sparking Interest in Investing
You may want to use common stocks to introduce your children to investing. Stocks are easy to explain and can be fun to track, especially if you start with companies that make products your children hold in high regards, like their favorite cereal, sports equipment, soft drink, or digital products. Once you show them how to track performance by going to the company website, or to general financial sites where they can find news stories about the company, it should be easy to get them involved.
There are several ways to make investing come alive. One is to set up a hypothetical family account, either online or on paper, and track the ups and downs of the portfolio you choose together. Another is to “sell” each child some of your own shares. For example, if you’re planning to buy 200 shares of a particular company and you have two children, buy 202 and sell the extra shares to them at the price you paid.
You can keep track of the children’s shares in a separate register so they can follow what happens to their shares. (You should probably be willing to buy the shares back if they prove disappointing.) Finally, you might check giveashare.com, where you can buy single shares of a number of companies.
Opening Accounts for Children
If these approaches are too casual for you, or for your children, you can open separate accounts for them. You’ll have to decide on the mechanism, but there are several viable alternatives. Remember, you can give each child up to $15,000 in cash or other assets in 2018 without incurring gift taxes. If you’re married or have a partner, that person can also gift $15,000. That’s true of grandparents and other friends and relatives as well.
You can open a guardian account for each child. In that case, you are the owner of the account although your child could make the decisions. Earnings are taxed at your rate.
You can also open a custodial account, either an UGMA (for Uniform Gifts to Minors Act) or UTMA (for Uniform Transfers to Minors Act). The child owns the account and you control it until he or she reaches the age of majority, usually 18 or 21, depending on the state. Taxable earnings are taxed at your rate until the child is 19 or 24 if he or she is a full-time student.
If your child has earned income, you can open a tax-deferred or tax-free Roth IRA in the child’s name. The contribution limit is $5,500 in 2018 or as much as the child earns if it is less than that amount.
One word of caution: If you want to teach your children valuable lessons about money, the keys are being committed to the approach you adopt and knowing what you want to accomplish by using it. Otherwise, it’s unlikely to work for very long, whatever your good intentions.