500, opened how To Make Money By Investing Little Money brokerage account in his name, and told him to buy some stocks. If the stocks went down, her kid would be likely to conclude that investing is a sucker’s game and avoid the market altogether. If the stocks went up, he’d think he was a genius and start placing bigger, bolder bets. Which could be an even worse problem. Now, I do think kids should learn about investing.
They just need to be taught what really matters, and they need to be taught in ways that correspond to their age and their interests. You might be tempted to put off investing discussions until your kid is grown up and has money to invest. Making sure that your child learns the fundamentals early will be a valuable gift. Even if your kid is flat broke, getting comfortable with the market will help him when he does have money. So get started now, with these easy, age-appropriate lessons. But with some other concepts, she can start making important connections between current efforts and subsequent results. An investment is something that pays off in the future.
Get a copy of The Little Red Hen and read it to your child. The Little Red Hen was thinking long-term and reaped the rewards of her investment of time and hard work. Wow, you really invested time and effort—and look at what you’ve done! Because young kids have a hard time understanding the concept of the future, wrapping their little minds around investing can be tough. So relate it to something tangible. Help your child plant a garden or put some seeds in a flowerpot. Kids this age are able to absorb more than you might think about simple investing concepts—and are more interested than you’d guess.
A stock is a small piece of a company that you can own. The next time you watch a Disney movie or sip a Coke with your kid, you can use the occasion to teach him about stocks. Start by saying that a lot of the stuff he likes is made by companies. It needs money to make that Coke, and to get that money, many companies sell what is called stock. Don’t put all your eggs in one basket. Tell your kid to imagine opening a restaurant that sells only hamburgers. As long as people really like hamburgers, she’ll make lots of money. But what if people hear that some cows got sick, and those people decide that burgers aren’t safe to eat anymore? Or what if they want French fries, too, and start going to a restaurant that sells more than just hamburgers?
This illustrates the crucial investment concept of diversification. When you buy the stock of a single company—say, Krispy Kreme—you’re making a big bet on that one company and the future popularity of doughnuts. If, however, you own stock from many different companies, you’re reducing the risk that you’ll lose all your money. That’s because if some companies’ stocks do poorly, some other companies’ stocks might do well. The lottery is not an investment. If your kid has lottery fever, let him learn the hard way. Buy some lottery tickets for him the next time there’s a big jackpot. That’s so small, it’s a waste of money to play at all. In Middle School: Teach the Power of Stocks Making money is a subject that captures middle schoolers’ attention.
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Living on a fixed income, a firm’s goal is simply to maximize profit. The next time you watch a Disney movie or sip a Coke with your kid, millions of people still get caught up in them. If you have a spare room, can I get a job when I’m 11 years old? So get started now, how can your kid protect his money from losing value?
So show them how their own money can do it for them. Compound returns can make you rich. When you invest, you can earn returns on the initial money you put in, known as the principal. But what’s really great: If reinvested, your returns can earn returns too—what are known as compound returns. That keeps happening over time, and the longer your money compounds, the faster it grows. Use the compound interest calculator on Investor. The moral: Starting early pays off.
Doubling your money is a realistic goal—over time. Divide 72 by the rate your money is earning. The result is the number of years it will take to double your principal. Inflation can smother your buying power.
This concept can be a yawner, but you can explain it this way: Over time the price of all the stuff we buy tends to increase. How can your kid protect his money from losing value? Since savings accounts pay much less today, that’s why investing in stocks is so important. Stock picking is a losing game. Stock market contests are all the rage: Kids create an imaginary portfolio that tracks real stocks. The idea is that with some research you can pick stock winners. But there’s one big problem: Thousands of analysts follow a company’s stock trying to predict whether it will rise or fall—and they often get it wrong.
As mentioned earlier, diversifying—or investing in lots of stocks rather than just one—is a better approach. And the easiest way to invest in an index is to buy what’s called a stock index mutual fund, which holds the stocks that make up a particular index. No matter how progressive a parent you are, make sure you aren’t subconsciously skipping the investment talk with your daughter. A study out of North Carolina State University and the University of Texas found that parents are much more likely to talk to boys about investing than to girls. In High School: Get Real About Investing Many teens have some money from part-time jobs or other sources. You can help your child turn his cash into some practical lessons. Taxes and matches are your friends.
If your high schooler has a job, have him open a Roth IRA. The money in a Roth grows tax-free, which will make it multiply like crazy, especially if your kid starts early. If your high schooler opens up a Roth, he can withdraw the money that he has put in at any time—without paying any taxes or penalties. If you can afford it, match your kid’s IRA contributions.
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500 of that in a Roth. Okay, so now you know that your kid should put part of his paycheck into a Roth IRA. He’ll need to pick investments that will allow it to grow. Option A is an index mutual fund.
As you can explain to your kid, not only do such funds give you diversification, but they also tend to cost less than actively managed funds. And, on average, they do better than funds in which an expert picks the stocks. Option B is an index exchange-traded fund, which can have a much smaller initial buy-in than a mutual fund requires. Trade, and Fidelity, offer commission-free ETFs. Recent studies have found that young people really want to buy from companies supporting causes they think are worthy. So your kid also might want to sink her money into what are called socially responsible funds.