If you believe that investing is only for adults and big earners, you are definitely wrong. And it’s not good for your kids if you teach them the same thing.
Warren Buffett, considered the greatest investor of the 20th century, got his feet wet in the world of investing at the age of 11. Two years later, he declared that he will become a millionaire by the age 30. Today, Buffett is worth billions and counting….
Buffett, a.k.a “The Oracle of Omaha”, was of course lucky because his father owned a brokerage company — a fact that contributed to his intense interest in saving money and investing them in companies.
But you do not need to be a Buffett to teach your kids the value of investing early. You can plant in them the investor seed now, and see how it will flourish later on.
Why teach your teens now
Time and the incredible power of compounding interest are on your teenager’s side when he or she invests early. That means they have enough time for their money to grow and to ride the fluctuations that are inherent in investing. Young people can take risks that older people cannot because they are still decades away from retirement. They can afford to lose money in exchange for knowledge and, if they persist, still come out on top. “The sooner the better” is the aphorism and that’s just how it works.
Roth IRA is the way to go
A good starting investment for your teenager who has already a legitimate income source would be a Roth IRA (Individual Retirement Account). Yes, it’s never too early to open a retirement account. Fund-based Roth IRAs are managed by professional fund managers so you can rely on their expertise about growing your money in high-yield markets. And the best thing is that Roth IRA isn’t only for retirement. You child can withdraw his account anytime for whatever reason, be that a car payment, a college tuition, or who knows…his own wedding.
Investing for teens rule of thumb
Because young people can take riskier investments, a good rule of thumb is to put 75% of their money on high-risk, high-yield investments and 25% on medium to low-risk investments. That way, they will be able to take advantage of the growth opportunity that investing can offer.
However, if they intend to invest in a mutual fund type of Roth IRA, this may not be necessary since it is already a managed fund with its own asset diversification and risk allocation.
How to encourage your teens to invest
Not all kids are receptive of the idea of saving money and putting them away where they themselves cannot access. They might not like to delay gratification so they would rather spend their money on clothes and gadgets. But don’t despair, there are still ways to encourage your kids to invest. Consider the following.
Match her contribution
If you can afford to match her contribution to her Roth IRA, say $1 for every $5 she invests for a specific period of time, she might find ways to make more contributions to her account because she’ll see her money grow instantly from your own contribution. And if she doesn’t touch it for 5 years, you might want to add a bonus, too.
When she sees her money grow, you might not even have to contribute anymore, investing itself has already motivated her.
Talk about possible rewards & risks
Sit down together and have a money talk. If necessary, show him some figures, tables or charts, and tell him how he can turn a profit by putting his money in an account. Likewise, explain to him why investing early is the best thing he can do with his hard-earned dollars: spending it away will make him poor, while saving it in the bank will not be enough to fight inflation rates.
Example: if your 18-year-old son invests $2000 and contributes as little as $30 monthly on a Roth IRA that grows at an average of 10% annually, he will have around $14000 by the time he’s 30. At that rate, the total inter est he would earn is twice as much as his actual contribution. If he stops contributing after 10 years but chooses to withdraw his money only at the age of 65, his investment would be worth about $390,000.
Of course, you’d want to paint a realistic picture and not leave out the negative side of investing. Especially with high-reward investments such as stock-based accounts, there will be stomach-turning risks or years when declines are greater than growth.
Nonetheless, you can present other safer investment types such as money market funds or even high-yield deposit accounts. Still, if they show no interest, now may not be the best time yet.
But don’t give up too early because teaching your teens how to invest could be the best thing you can do to help them secure their own financial future. And I swear they will thank you for it later.