The following is a special post from our brand new parent blog, The Money Talk. Consider this a sneak peek, then bookmark www.bkmoneytalk.com to read all of the parent-minded posts moving forward!
A 15-year-old invests $1000 from their summer earnings into a portfolio of stocks and bonds. Meanwhile, a 40-year-old invests $10,000. With a 10% interest rate, who makes more? When the teen turns 65, they’ll have $116,000. Then the adult reaches the same golden age, they’ll have just over $108,000. When it comes to investing, nothing is more powerful than time. As a parent, you have a unique opportunity to encourage and support your child in crafting an investment plan. Here are four vital areas to address with your teen tycoon.
“Blanching” with Two Realities
Blanching is the process of quickly dropping food (like fresh asparagus or green beans) into boiling water, then quickly transferring them to an ice bath to stop their cooking and keep them crisp. Effectively talking to a teen about investing is a lot like the culinary process. First, the shock of what could be: like turning a hundred dollars into a million. But just as soon as their mind begins to simmer, it’s time to present the other reality, like losing your savings to a unforseen stock market collapse or financial scam. A teen needs to see the world of investing for what it is: a balance of risk and reward.
Planting a Seed
Once your teen has been effectively inspired and sobered, the next step is to get some skin in the game. It might sound easy to just provide your teen with some seed money to invest, especially if they’re looking into the best stocks for beginners with little money. But the more skin they have in the game, the more effort they’ll put into their investment strategy, and the more they’ll learn as a result. If you just can’t help but get involved, consider matching their funds dollar-for-dollar, just like an employer would.
Assuming your child is younger than 18 years of age, there’s one area that your involvement will be a non-negotiable. That is the account setup stage. Minors will need a “custodian” in order to open the account. The custodian’s social security number, name, and address will be used alongside that of the minor’s to get the investment account up and running. Most brokers offer custodial accounts, and some even have special incentives for aspiring stock market mavens. Well-regarded kid-friendly brokers include Ally, Acorns, and Betterment.
Freakouts, Fees, and Follow-Through
Most teens love variety. Fast-paced activity and constant change are just a normal part of growing up. For a genius daytrader, such energy could be of enormous benefit. But to the average small investor, constant tinkering will result in one thing: fees. Most modern brokers charge by the trade. As a result, it’s important to encourage your child to let their investments sit. As tempting as it may be to sell a stock on during a day of market turmoil, Warren Buffett’s wisdom offers a clear warning: “be fearful when others are greedy and greedy when others are fearful.”
For more information about the power of compound interest, watch a clip from our episode on the subject below, or read our book for kids titled How to Turn $100 into $1,000,000.