There are several ways to think about investments for your children. Read on to learn how to use savings and investments to teach your children the value of money and to help them prepare for college and other long-term goals.
As you think about saving for your children's college, there are a variety of good investments, mostly mutual funds, that are appropriate. Read more about this here at FamilyShare.
As your child reaches the age of about 8 years old you should be able to explain the basic concepts of a savings account at the bank. Take your child to the bank with you and help her to open a bank account. You'll need to put your own name on the account with her, but she can have her name on the account and she can learn to make deposits - and withdrawals.
By helping her to establish a bank account early, you help her to understand how the banking system works. You also help her to understand the value of money. If you encourage her to save for some of the things she wants - especially the expensive things you may not be as excited for her to have - she'll learn the principles of saving and delayed gratification. Can you think of many more important lessons for your children to learn?
When she reaches the age of 12, she will likely be ready for a checking account. This will help her to access her money and to learn more about the system used to clear checks, how the money may appear in her account on-line for a day or two after writing a check and then disappears. This serves to help prepare her for more advanced investments in coming years.
Around age fourteen, she may be ready to invest in a mutual fund. You will want to help her choose carefully. Consider all of the following:
Investment horizon
Help her to determine the goals for her savings. If she is saving for college just four or five years away, that implies a different investment strategy than if she is investing for a car in two years or retirement in 50 years (starting a retirement savings account for a teenager is crazy smart-not crazy).
Stock funds
A stock fund would likely only be an appropriate investment for a teenager who is trying to get a jump on retirement savings. Other objectives like college or a car, are too short term for using the stock market - which could easily drop more in two years than it can recover in five.
Bond funds
A bond fund invests in bonds, which generally don't go up and down as much as stock funds. If you are investing for the long term, consider long-term corporate bonds; these yield higher returns than government bonds. If investing for the short to medium term, consider investing in short or medium term government bond funds. The returns are modest, but there is little risk of losing money. Learn more about choosing the right mutual fund here on FamilyShare.
Expenses
Focus closely on fund expenses. By choosing low-cost funds you can keep more of the money you earn for your child, giving her a better experience. Read more about finding low cost mutual funds here at FamilyShare.
After opening a savings account, a checking account and investing in a mutual fund, your child will have learned a great deal about how to function as an adult. She may even be ready for a credit card when she graduates from high school. Her investments may also make a meaningful contribution to funding her college education. That combination of factors will help to successfully launch her into adulthood.
