We often think of investing as a “grown up” thing to do. Many of us don’t think about letting our kids invest. However, this can be a mistake. Now is the perfect time to help your child start investing. In fact, teaching your child to invest now can yield great results later. There is also a great online tool to use to help manage yours and your child’s investments called Personal Capital! Here are 3 good reasons to help your child invest now.
1. The Power of Compound Interest
The beauty of compound interest is that the longer you have for it to work, the more money you end up with. You can start off putting much less into an investment account for your child when he or she is younger. When you help a child invest $100 a month starting at age 10, that money has several decades to grow. That money isn’t enough for you to create a solid retirement nest egg in 20 years, but your child can accomplish it when there are 40 or 50 years until retirement.
The earlier your child starts, the more money he or she will have later. You can help your child build long-term wealth when you get started now. Help your child visualize what is happening by showing him or her the account balance every now and then. My son loves watching his long-term savings account grow, and that’s only got a yield of 0.85 percent.
I recently opened a custodial Roth IRA for him. It’s a place for him to put a large portion of the money he earns from helping out with my home business. That account is even more fun for him to watch. With the account analysis, he can see charts that show how fast his money is growing. It’s a fun thing for him to see, and it will benefit him the future. Get your kids involved with the account, and they will be more likely to stick with it.
2. Tax Benefits Now
In some cases, you can provide your child with long-term tax benefits. Now is a great time for children to invest, since their taxes are likely to be lower. Have them invest a little in dividend stocks (especially those with DRIPs), and your kids can avoid some of the taxes, since their income isn’t likely to be high enough that they would owe.
I like the idea of a custodial IRA for my son because the money that goes in is after tax and it grows tax free. So, since he doesn’t make enough to pay taxes on his income, all of the money that goes into his IRA is tax free, and will grow tax free. That’s not a bad way to start out. Eventually he will get to the point where he earns enough to pay taxes, but the reality is that, right now, it’s all very tax efficient.
Realize that your child must have earned income — allowance and gifts don’t count. I will be issuing my son a W-2 this year, and we keep track of the hours he works for my home business on a time card. Double-check with a tax professional for the potential benefits, and to make sure you approach the situation correctly.
3. Develop Good Habits for Your Kids
Finally, you can help your child develop good investing and savings habits. This is a good way to teach your child the importance of investing, and help him or her get into the habit. Teach your child that a regular savings account isn’t enough; some of his or her money should be invested for the potential for higher returns.
Also, when you involve your child more in the investing as he or she gets older and can understand the concept better, you can prevent problems associated with panic investing. Teaching your children to invest at an early age, and discussing statements and watching long-term gains over short-term volatility, will help them get comfortable with the notion of cycles. They will be less inclined to panic and sell during down years, and more likely to ride out the storms without getting nervous. This can be a great gift to your children.
Encourage your child to start investing as early as possible. It will provide them — and you — with long-term peace of mind.