How Do I Talk about Investing with My Kids?
If you want your child to build a financially secure future, you need to teach them about investing for those under 18 and how to use apps like Flyte. Don’t worry, investing doesn’t have to be complicated and boring to discuss with your kids! In this article, we will explore the key topics you should discuss with your child, including investment accounts, easy investments, and savings accounts.
What is an Investment
An investment is using an asset to produce a future profit or income. For example, taking cash and purchasing a stock that pays you a dividend based on company profits or appreciates in price due to market forces. Investments are about sacrificing the present value of an asset in hopes of a greater return in the future. For example, instead of buying 1 Ferrari today, you invest the money and buy 2 Ferraris in 5 years.
How to Start Investing as a Minor
How to invest your money as a minor? Have your parents or guardian set up a custodial account! A custodial account allows your parents to invest money for you, and then when you turn 18, the account is handed over to you. With a custodial account, you can invest in a range of asset classes through an online brokerage or set up a savings account that can help you pay for college or purchase your first home!
Talk About Savings Accounts
A savings account involves depositing money at a bank and receiving interest on your money. Banks are happy to pay you interest because they use your deposit to make an even greater return by offering mortgages, loans, and other financial products. Savings accounts will only offer you minimal interest, less than 3%, and place restrictions on the number of withdrawals you can make.
Talk About Stocks and Bonds
If you aren’t satisfied with the interest rate from a savings account, you can invest in stocks and bonds. Stocks and bonds offer much greater returns, but also come with greater risks. Stocks involve buying partial ownership of a company, and your return is based on the appreciation of the stock price or dividends. Bonds involve lending money to an institution and then receiving interest on your loan. Bonds have agreed-upon terms, including the interest rate and length. You can buy stocks and bonds for your children on the Flyte app for free.
Compounding Returns
The awesome thing about setting up an investment account or IRA for kids is they get to reap the power of compound returns. Compound returns refer to the cumulative effect of investing. For example, if you invest $100, and you make 10% every year for 5 years, you don’t have $150 but instead, have $161. When you make regular contributions to an investment account and compound the returns for 20 + years, you can end up with large amounts of capital from modest investments. So don’t worry about how much money you should save each month, if you can spare a few hundred dollars each month, then after 20 years, you can easily end up with 6 figures in capital.
Risk Tolerance
Unfortunately, not all investments are successful. Therefore, you need to talk to your child about risk and that it is possible to lose everything from an investment. Your financial goals should dictate your risk tolerance. For example, if you have set up a 529 college savings plan to pay for your child’s college, then you should opt for a low-risk investing strategy such as S&P 500 ETFs and some investment-grade bonds.
Investing Games for Kids
To teach your child more about investing, you can sign up them to an investing game. One of the top games is Investopedia’s Stock Market simulator. The game is completely free and allows you to trade on real stocks at real prices.
The Bottom Line
Setting up a kid’s savings account or custodial stock investing app only takes a few minutes! This is the best way to teach children to save and invest because you can show them a real example of how finance works and even let them make some of their own trades!
