How to teach your kids to save and invest in 2022?

How to teach your kids to save and invest in 2022?

Updated on September 16, 2022 17:53 PM by Sally Harbor

In the modern day, the best way to increase your money is to invest it, and when this is started early in age, it is likely to be more fruitful. However, 39 percent of children have a savings account, and only 6 percent have an investment account where they hold stocks, mutual funds, or ETFs, according to a 2022 survey. 

If you want to give your children a brighter future, helping them learn about investing can be a good step forward. A recent Bankrate survey found that investing more is the biggest financial goal for nearly 1 in 5 Americans. And it's okay if you don’t know much about the subject, you can still teach kids the basics of investing and maybe even learn a little along the way.

Why should one begin investing in childhood?? 

You might be thinking of why we are emphasizing so much on making your children invest from an early age. But there is a very reasonable reason behind it. Most people don’t think a lot about investing as a child, but there are plenty of reasons why it makes sense to get started early. Here are some top reasons to get your children started with investing.

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1. Develops good saving habits 

Children learn quickly and what they are in their childhood is what they will become in the future. So teaching kids about saving and investing while they’re still young can have major benefits for them in the long run. It will help them understand that money is earned through work and is needed for necessities such as food and housing. You can teach them this by giving them allowances and asking them to save and purchase the particular thing they want with their own money. This will start building the habit of saving in them. 

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2. Teaches them to take risks 

Risk is one factor that can make children learn quickly. Children can also learn lessons from the risk involved with investing. Some investments have very low risk but offer returns that are also quite low. On the other hand, some options, such as stock investments, come with higher risk but also have the potential for strong and profitable returns.

Also read: Best Cryptocurrencies Of August 2022

One of the best ways to learn about these investment differences is by having real money on the line and seeing how your investments perform and how you react to the gains or losses. Kids might also sense their risk tolerance, which can help guide them throughout their investing lives.

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3.The compounding returns 

Getting compound rewards over a long period is one of the biggest reasons to start teaching your kids about investments early in life. For example, if a child can save up $2,000  and invest it when they’re ten years old, it will be worth about $289,000 when they’re 65 years old or nearly $890,000 when they’re 80 years old, assuming 10 percent annualized returns, about the average return on the S&P 500 index over time. These are just average numbers, and the results depend on when one starts investing. 

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4. Gives more time to recover from losses 

Another benefit of investing early is that kids have that much more time to recover from inevitable losses. The kids will have many decades to invest, giving them the opportunity and plenty of time to recover any short-term losses due to market sell-offs or economic difficulties. Instilling a long-term mindset in children is very important to make them good investors, as no one’s time horizon is longer than a child’s.

5. Gives financial security sooner than you think 

Getting kids started with investing may also increase the chances that they reach financial security sooner than they would if they started later in life. The compound interest grows over time. So if one has 10-20 years of a headstart over the others, the fruits will come to them sooner than the others. 

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Someone who is an aggressive saver as a child and continues to be one early on in their career will likely be in a strong financial position when it comes time to retire and may even be in a spot to retire early.

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Some of the best accounts for children to get started 

  • Custodial Roth IRA: A Roth IRA is one of the best options for saving for retirement, and if your child has a paid part-time job, they can qualify for a custodial Roth IRA. In this account, the parent who opens the account manages it until the child turns 18 or 21 in certain states. The account’s value can grow tax-free, and contributions can be used for expenses that pop up down the road. In contrast, contributions and earnings can be withdrawn penalty-free for qualified educational expenses.
  • 529 education savings plan: it is similar to the account we just talked about, but instead of saving for retirement, it allows you to save for a child’s future education. The money is allowed to grow freely without taxes, and withdrawals are tax-free as long as they’re used for qualified education expenses. One may even get a tax deduction for contributions depending on your state. You can open an account through most online brokers or robo advisors.
  • Custodial trust account: This type of account is known as the UGMA or UTMA trust account and is opened for the benefit of a child. The adult remains the guardian of the account till their child turns 18-25 years old, depending on the state. The accounts have more flexibility than the 529 education savings plans but do not come with the same tax benefits.

  • Brokerage Account:Some brokers allow minors to open their brokerage accounts, giving them ownership of their money and investment decisions. This account can be opened by children between the ages of 13-17 years and can be operated without fees or minimum balances. One can instantly open it and start saving and investing. A brokerage account is rather taxable, so one must pay taxes on any income or capital gains they earn. 

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How to manage the money

This question might be popping into your head too often, right?? So here is the answer to it. Before you tackle investing with your children, it’s a good idea to start with basic financial concepts like saving and spending.

Robert Farrington, the founder of the financial education website called “The College Investor,” in a speech, said, “Introduce banking and savings accounts to kids as they grow, so they learn where to hold their money easier.” “There are many products and services designed to help tweens and teens that allow for debit cards and money management help, with parental controls.”

By the time your child reaches high school, Farrington says, they should have a checking account with a debit card and set up direct deposit for paychecks they earn from a job.

The basics of investing 

To start teaching them the concepts of investing, begin with the basics of it, including explaining 

how a stock or share of a company allows them to have ownership in that company they invest. Another way can be to show them your investment portfolio if you have any, which will help them see your compound returns. This will easily motivate them to get their result. 

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Also, consider explaining that it’s possible to reduce some risks by using some of the best index funds to get instant diversification rather than trying to figure out how to pick the “right” stock. Toys can be another way to make them understand this concept, “Kids know what it’s like to get caught up in the hype of a new toy, like Beyblades, that doesn’t last,” an investment bank stated.“Relating it to toys and fads makes the idea more tangible.” Gifting them stocks also can be another way to make them understand the matter, and it can also let them make some of their own choices and mistakes along the way. 

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Farrington, in his speech, had also pointed out that his parents had opened an account for him when he was a baby and had given him access to some investing choices and portfolio tracking tools as he got into high school.

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Opening an account 

One of the best ways to start investing is to open an account for your children. Minors are not allowed to open their accounts, but their guardians have permission to do so with the help of custodial accounts. Stash, Stockpile. Acorns, etc., all allow you to open an account on your child’s behalf. 

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Your child has earned income from babysitting or some other job; they can contribute to a Roth IRA up to the amount earned. This is one of the ideal types of accounts for kids’  investments since the earnings increase without any tax, and the account can also be tapped early for things like a first home purchase or when any other incident occurs. 

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To open an account, the guardian will need their information, including the Social Security number, as well as the child’s legal name and Social Security number. The custodial accounts revert to the child when they reach the age of majority in the applicable state, usually at age 18 or 21. Once that happens, the money becomes theirs to control, and the Guardian no more has a say in it.

How to keep children engaged

Teaching kids about investment should never stop; it must be taught continuously. Parents should constantly have an ongoing dialogue about their child’s investments, including discussions about losses, gains, and mistakes. 

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It’s also possible to use stock simulators and other tools to teach them different scenarios. However, the best lessons are about consistency and how money multiplies. Letting kids see how money makes more money can get them hooked on investing.

The earlier you invest in your kids, the more likely they will develop better financial habits and build wealth over time. So start teaching them about it today. 

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