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financial literacy

What You Need to Know When Teaching Kids About Investing

Learn how to teach kids about investing with this EarlyBird guide.

Last updated:

April 26, 2022

EarlyBird helps parents, family, and friends collectively invest in a child’s financial future. Learn more.

What You'll Learn

Investing is a total mystery to a huge portion of the population. It's also a cause for anxiety given the gravity of the money decisions we face on a daily basis.

But that fear is all about a lack of understanding. By investing early, you can create a huge nest egg that will unlock all sorts of doors throughout your life — which is why it’s critical you start teaching kids about investing as soon as you possibly can. 

You’ve got to show them that it’s nothing to fear. With the right foundation in financial literacy and the right tools, navigating the investment world can be a whole lot of fun. You’ve just got to teach kids how to do it.

This guide explains why you should teach kids about investing, how to do so, and the best ways to help kids invest.

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Why You Should Start Teaching Kids About Investing

Most people want the children in their lives to grow up with a bit of financial freedom. After all, the world is an expensive place — and a lot of those expenses start to come out of the woodwork immediately after kids come of age.

Between college tuition, rent, and travel, a lot of young adults end up trapped in debt before they even hit 20.

According to researchers at FINRA, 19% of Americans admit to spending more money than they make on a monthly basis. Worse yet, 1/4 of us don’t even have an emergency fund to fall back on in case the boiler breaks down, or the car doesn’t want to start.

But with a little forward-thinking and preparation, you can make sure the kids in your life don’t get saddled with loads of debt straight out the gate. That’s where investing comes in.

Investing is all about putting the pieces into place now to build wealth for the future.

According to researchers at Goldman Sachs, your typical ten-year stock market return has hit an average of 9.2% per year for the last 140 years. The S&P 500 index has generated even better returns. Over the course of the last decade, S&P 500 returns have averaged 13.6%, with this increase due to a major run-up in tech stocks.

Screenshot of table showing S&P 500 returns
(Image source)

With returns like that, it’s possible to help the children you love build a pretty big nest egg throughout their childhood — especially when compared to the paltry annual percentage yield (APY) of today’s savings accounts.

Saving is a really important way to help safeguard the financial futures of the kids in your life. It’s especially useful when trying to reach short-term goals or create an emergency fund.

However, due to opportunity cost (which is basically the loss of what you could have gained by investing your money elsewhere) and a loss of purchasing power due to inflation, saving is not the best option when it comes to long-term goals.

Your typical savings account only generates an APY of 0.06%. While that compound interest is certainly going to be a welcome addition to a child’s savings, it’s not the best way to make your money work harder for you.

By investing, you can really put your cash to work and create generational wealth to pass on to the kids you love — and it’s important for you to share that with those children as they get older.

Investing for kids isn’t just about creating wealth for those kids. It’s also about helping them develop financial literacy skills.

Financial literacy includes all of the knowledge you need to make financial decisions. This includes the basics of money management, credit and debt best practices, account types, investing, insurance, and taxes. But for now, we’ll stick to the investing element of financial literacy.

By teaching kids about investing from an early age, you’ll be able to rest easy knowing the assets you’re investing for them now won’t go to waste or be poorly managed in the future.

How Do You Teach Kids About Money and Investing?

We’ve covered why you should teach kids about investing. Now, let’s talk about how you should go about doing it.

It doesn’t matter whether you’re a parent, grandparent, aunt, uncle, or godparent. Teaching kids about investing is often unfamiliar territory for most of us, and so you may not know where to start.

To help, we’ll cover a few of the most tried and tested ways to get kids into the world of investment.

Start with financial literacy basics

One of the first steps you should take in teaching kids about investing is to show them how to budget.

This process might include getting children to help complete your family’s monthly or annual budget. If that child gets a weekly allowance, you could also encourage them to write a plan detailing how they intend to spend that allowance.

How does budgeting contribute to an education in investment? Simply put, it helps children understand how much money they’ve got available. From there, it’s then possible to work out how much of that money they can realistically and safely afford to invest.

Illustration of woman drawing graph

The next foundational skill you’ve got to teach kids is how to save. Encourage the kids in your life to create financial goals, and then explain to them how they can achieve those goals through saving.

For example, instead of letting kids blow their allowance on a cheap toy, show them a much better (but more expensive) toy they could work to save for. Saving and setting goals is a huge aspect of investing — because the longer the kids in your life are willing to devote to a particular investment, the greater their potential returns are going to get.

Finally, you need to teach kids how the stock market works.

This starts by normalizing stock market vocabulary words and explaining what each one means.

Talk to kids about the basic differences between common securities. That means drilling down into how stock shares work, what bonds and mutual funds are, and how exchange-traded funds (ETFs) operate. You’ll also need to walk them through how stocks get bought and sold and the rights that a lot of stock owners are entitled to.

But don’t forget to explain to them there are risks when you invest, too. Some investments are very low-risk, while other investments are high-risk, high-reward. Talk to children about what that risk means and when it may be worth entertaining a higher risk tolerance.

Set up an investment account

Sometimes, the best way to learn is by doing — and when it comes to investing, a lot of adults find it easier to teach kids how to invest by showing them first-hand.

According to UK researchers, just 27% of children enjoy learning about money in school. A lot of that boils down to the fact that stock market games and learning tools can be a bit tedious and dull. 

So, what better way to teach kids about investment than to show them what happens with real money? 

By setting up an investment vehicle like a UGMA custodial account, you can start investing in assets today that will create wealth for a child’s future. What sets custodial accounts apart is that they’re designed exclusively with kids in mind.

Illustration of woman sitting with baby below giant shield

When you set up a custodial account, you can invest cash in a pre-tailored investment portfolio that is trackable and easy to manage. 

That means as kids get older, you can start to explain each investment in their portfolio. You can demonstrate how those assets generate unearned income through compound interest and even get them involved in the process of choosing which types of investments they’d like to add to their asset mix.

This way, the child you love is learning about investing with the knowledge it directly impacts their future. But it’s also important to remember that you, as the adult, are safely at the helm. That really offers you the best of both worlds and helps to teach kids about investing in a way that games or homework sheets never would.

What is the Best Way to Help Kids Invest?

Now that we’ve covered why you should teach kids about investing and how to get started with that financial education, let’s get more specific about setting up investment accounts.

As kids get older, they might be tempted to invest directly in the stock market — especially if you’ve been doing an amazing job helping them to develop their financial literacy skills.

Unfortunately, investing directly in the market is pretty hard for kids until they turn at least 18. To buy and sell stock shares, you’ve normally got to go through a brokerage account. The catch-22 here is that brokerage firms don’t usually let you set up a brokerage account until you’re a legal adult.

Bearing that in mind, if a child wants to start investing, they’re really going to need an adult’s help.

There are quite a few options you can explore here — including investing in a 529 plan or setting up a custodial brokerage account. But if you’re on the hunt for one of the most tax-efficient ways to invest in a child’s future and teach them about investing, a UGMA custodial account is generally going to be your top option.

We’ll explain why.

UGMA custodial account

We’ve already talked a little bit about custodial accounts and why they’re a great way to teach kids about investing. But let’s dive a bit deeper and explore how they actually work.

A custodial account is a tax-beneficial investment vehicle that helps an adult invest for a child beneficiary.

When you set up a custodial account as an adult, you’ve got to name a child beneficiary for the account. That beneficiary then becomes the legal owner of every asset you place into that account — but because they’re too young to make their own financial decisions, you must serve as the custodian of those assets until they reach the “age of majority.”

The age of majority is slightly different in some states, but it’s usually going to be either age 18 or 21.

After the child beneficiary reaches that age of majority, the custodianship ends, and they can start using the assets however they’d like to. The key here is to ensure that the investments you’re making today as the account’s custodian will maximize the potential returns your child beneficiary will be able to use tomorrow.

That’s where EarlyBird comes in.

Screenshot of mobile view of EarlyBird app

By setting up a UGMA account for a child through EarlyBird, you’re going to be able to select one of several carefully tailored ETF-based portfolios. Those portfolios are composed of both bonds and securities, which gives you the opportunity to teach kids about a number of investment types.

You can even invest in crypto for kids.

But the exact portfolio you (and the child) select will depend on a number of factors like the child’s age, investment goals, your time horizon, tolerance for risk, and more.

Another reason a UGMA custodial is one of the best ways to invest for a child is that it represents tax savings. Because everything in a custodial account belongs to the child beneficiary, unearned income is taxed at the child’s lower rate (up to a certain threshold) rather than the custodian’s tax rate. This is referred to as the IRS “Kiddie Tax.

Conclusion

By helping children develop a proper foundation in financial literacy, you’ll be giving them all the tools they’re going to need to navigate the investment world. It can even be fun — as long as you’re safely at the helm.

At the end of the day, there are several different strategies you can pursue when teaching kids about investing. But one of the best ways to be proactive toward that financial education is to start investing and show kids the power of investment first-hand. A custodial account is a perfect way to do that.

So, are you ready to start teaching kids about investing first-hand? Get EarlyBird and start investing today.
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This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.

Author

EarlyBird Team

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INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.