Kids and Money: Early Experience is Priceless
It’s good for young kids to have exposure to money, learning the consequences that come with different financial decisions while the pain is relatively mild.
With young kids, depositing the weekly allowance in different jars – spend, save, and give away – helps them appreciate what money is for, enjoy the deferred gratification of saving for something, and the gift it can be to help others with our resources.
As they get more responsible (or maybe as you want to teach more responsibility) move from putting money in jars to depositing it in their own bank accounts and if they’re old enough, give them a debit card, letting them be in charge of managing it. Talk about bank statements when they come in the mail, connect to an app like Mint so they can track their spending, and watch them learn in real time that spending means they'll have less money. Tracking lets them see how small amounts count up (I spent HOW MUCH at Starbucks last month?) and gives them an awareness of how cash flows. Letting them spend, and run out of money, is the best lesson you can give. Don’t bail them out. Let them suffer the consequences of not having planned for future expenses; soon they’ll be better at planning.
As they start to earn money, consider helping them open a Roth IRA account. As a person with W2 income, they can contribute up to $5500 (100% of their W2 earnings, with a maximum of $5500). It doesn’t have to be the actual money they earned – you might let them spend it, and decide that YOU will fund the Roth account based on their earnings. Even if they just earned $400, it’s an opportunity to put $400 into a Roth. That money will grow tax-free over time. They can experience watching it, knowing that because they worked they have these investments.
If they’ve been in place for five years, Roth IRAs can be used toward house down payments, for college, and in times of disability or unemployment without penalty. If they will need this money for college, be sure the Roth will have been open for five years before they have to withdraw to avoid penalties.
Another way for kids to learn about investing is for them to manage their own investment account. Before you dismiss this idea, let me tell you that it’s been tested on my own son. I’ve used an app called Robinhood that allows for very small accounts, and lets him make extremely small stock trades at low to no cost. If a kid likes Target, they can buy one share, be a shareholder, watch the stock go up and down, buy more or sell, and learn about the stock market in real time. The loss is limited to how much you put into the account, and the lesson in real life investing experience is priceless. So are the conversations. Kids watch companies with the sudden awareness that they’re businesses, they read news with greater interest, and search for sectors or companies that have products or philosophies that they feel are buy-worthy.
Don’t shelter your kids from learning about money. There are too many ways to make bad financial decisions these days, the more they know, the better off they’ll be.