By Elizabeth Ayola from Nerd Wallet
During my late teens, my mom handed me two worn out passport-size blue books with details of my custodian investment accounts. I had no idea what to do with them, but it didn’t matter, because the accounts were empty anyway. Perhaps for the better, because I’m sure my origins wouldn’t stand a chance.
I am now a mother, and I have opened a trustee account for my 4 year old son, often thinking about how to set him up to take control of his investments in the future. If you’re looking for ways to prepare your child for investing, an experienced parent and financial expert has some ideas.
Early stock values
Preparations begin as early as possible when it comes to teaching your kids money, says Christina Livadari, certified financial planner and co-founder of Mana Financial Life Design in Marina del Rey, California. No matter your child’s age, you can start by talking openly about finances and sharing your values about money.
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Something I started doing with my son was teaching him the value of giving, by encouraging him to give up toys before buying new ones. One technique Livadary recommends for teaching financial values is to assign what you refer to as a “job description” for every dollar you give your children.
“One of my favorite things is taking dollars and really splitting them in ways that really align with values,” says Levadari. “So let’s say you get $3 a week – $1 on giving, another dollar for saving, and another dollar you spend.”
Teaching the basics of investing
A custodial brokerage account is an investment account opened by a parent or guardian for a minor until he or she reaches the age of majority.
If your child has a job with taxable income, you can also help him open an IRA or a Roth IRA.
The good thing about custodial accounts is that although children do not control the accounts until they reach adulthood, you can show them what is happening.
Michael Costello, a retired Miami-based executive director of consumer products and a father of three, says he prepared his now-grown children to manage their guardianship accounts by teaching them how to budget and save early on. It also allowed them to view and watch their investment accounts grow, and facilitated investment discussions with them.
“We ended up having a lot of conversations about why are you holding long? What should you look at? What are ETFs versus common stocks? What do bonds do?” He says.
Teaching his children about exchange-traded money and other assets made him confident that they would have access to trust accounts when they turned 18.
There are many ways to teach your children the power of investing. Helping them understand what compound interest can do for every dollar they invest can motivate them to invest in the long term. If you think they are ready to start trading, some brokers offer youth accounts that allow teens to start investing under parental supervision.
Set goals and flag late honors
Delayed gratification is an important adaptive skill that parents can teach their children to manage guardianship accounts, says Anna Njie Conti, CFP and founder of Dare to Dream Planning in New York City.
Because custodian accounts are brokerage accounts that can be tapped into at any time, it’s important for kids to view their investments as long-term money that can buy them flexibility and options in the future, she says. This can help them refrain from spending it now.
“I think one of the great strengths of people who have really only had financial success and a successful period, is when they have the ability to say, ‘I know I want this now, but it would be so much better if I waited and if I kept going,'”
But for delayed gratification to work, it’s important that I have goals and a financial plan, which I didn’t have as a teenager, and why I believe the investments in my trusteeship account weren’t going to last long. For the record, my financial plan was to become a wealthy actress and fund all my life expenses in this way.
When setting financial goals with your children, it is a good idea to set both long and short term goals. why? Levadari says some people aren’t inspired by financial goals that are too far ahead.
“Sometimes a house is bought in the next three years, but sometimes it’s on vacation…and that’s okay. This is their version of a life they are happy to live in,” she says.
Trust the process
It’s also okay for your kids to make money mistakes—they can be teachable moments, Costello says.
“You can’t hold them in and take them, you have to give them control, and they have to make some mistakes, and then over time, they kind of figure out how to manage money better.”
If, despite their preparation, you feel that your children are not ready to manage their assets, another option is to transfer some of their assets to a trust where you can retain control beyond the age of majority.
This column was provided to the Associated Press by personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Elizabeth Ayola is a writer for the NerdWallet. E-mail: firstname.lastname@example.org.