Parents want their children to be successful. So what’s one good thing you can teach them that will help them for the rest of their life? Consider opening up the world of stock investing.
Data shows that young people typically don’t invest right away. Only 18 percent of adults between 18 and 25 hold any stock at all, according to a Bankrate survey. Many young people find the idea of investing intimidating or think they should wait until they have more money to put away. Plus, there’s no shortage of fun things they can buy for immediate gratification.
This type of procrastination causes them to miss out on two of the most powerful drivers of return on your money: Compounding and time in the market. The earlier they can get started investing, the greater the potential benefit.
For example, if a person invests $1,200 a year into a portfolio averaging 6 percent, from age 40 to age 65, the portfolio will grow to around $70,000. However, if that same person starts investing the same $1,200 a year at age 18, then at age 65 the portfolio will be worth over $300,000.
The best way to teach children about investing, especially in stocks, is to make it easy and fun for them to get started. If the young person is old enough to have a part-time job or other source of income, parents can make an initial deposit into an investment account and can incentivize future savings by matching each contribution the young person puts in.
They may even want to setup an automatic investment program where the young person can direct deposit money into an investment account systematically. Over time, your kids will be able to see and experience firsthand how money can grow due to the magic of compounding.
Since the stock market can be intimidating for young people, you will most likely have to help them figure out what investments to allocate money into. This is where it can be fun. There are stocks that have more youth appeal than others. Pique their interest by investing in stocks of companies they like or relate to such as technology, biotech, or video gaming. If they are socially conscious, there are certain investments that cater to green technology, social justice or other themes.
It doesn’t have to be complicated. They can even invest in an index fund. The whole idea is to expose your kids to the principles of saving and investing. This can be one of the most valuable lessons they will carry into their future.
• Mike Piershale, ChFC®, RFC® is president of Piershale Financial Group. If you have financial questions on this column, contact us at Piershale Financial Group, Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You may also email firstname.lastname@example.org.