Some years back, a woman I know worked on the fringes of the film industry. She was invited to a bar mitzvah, one she knew would be packed with wealthy people. Because her budget wouldn’t allow for a super-expensive gift, she got creative.
Knowing the young guest of honor liked music, she bought a Hard Rock Cafe jacket and a few shares of Hard Rock stock. The boy loved the gift and started reading the business pages of the paper every day to see how his stock was faring.
I don’t know if it turned him into a captain of industry. I do know that at 13 he was starting to think about money management. That’s huge.
Buying stock of companies that make a child’s favorite things is a great way to teach finance. Here’s how to make this approach a success:
Start by explaining how the stock market can help build wealth over time. If you need a little guidance yourself, check out: “11 Tips for Sane, Successful Stock Investing.”
What you don’t want is to teach a child to gamble. Here’s the difference between gambling and sane investing, as explained by Jean Chatzky, finance editor for NBC’s “Today” show:
A gamble – in most cases – is placing a bet where you can do nothing to affect the outcome. What you want to take is a calculated risk. That’s where you have done enough homework to believe that the company you’re buying will do well in the future.
If there’s one thing with which kids can identify, it’s homework.
Which stocks to buy?
My partner’s mom bought Apple stock for her two grandkids way back when it was cheap. When the younger boy got to high school, he’d look at his classmates’ latest iWhatever and say, “Thank you for making me rich.”
While not everybody is able to buy Apple stock these days (the tech giant’s shares are now going for about $116 apiece), perhaps there’s another tech company that’s more affordable. Also consider the companies that make the child’s favorite stuff — such as toys, movies, games, clothing and restaurants.
Some kids do better with a visual versus an abstract representation of money. Consider buying a “stock starter package” from a site like FrameAStock.com, which offers single shares of many stocks as framed certificates. Put it on the wall of your son or daughter’s bedroom as a constant, subtle reminder that wealth-building is something that can be achieved.
Starting on a shoestring? Check out: “How to Get Started Investing When You Don’t Have Much Money.”
And if your kid doesn’t automatically start reading the business news, either on paper or online? Help him out! For example, if his stock has a big gain, you could say something like, “I see you got quite a bit richer today.” That should get his attention.
But suppose the stock takes a dive? This is also a teachable moment, i.e., your chance to explain the “stay the course” mentality. Selling in a panic is not the way to build long-term wealth.
Other smart ways to give
Another way to encourage a healthy financial future? Start a college savings account for your child. While a degree no longer guarantees employment, it’s often key even to be considered for a job.
Incidentally, a college fund can also be applied to training for a number of jobs that pay well and don’t require four-year degrees. Maybe your kid would rather train to be an electrician, plumber or phlebotomist. If so, then the money will be there.
If your youngster is already working, start a Roth IRA as one of this season’s gifts. Offer to match whatever she puts in during the year (within the legal limits). That way your kid learns the habit of saving but doesn’t have to give up all her hard-earned funds right from the start. (Tip: Use an investment calculator to show how even $20 a week will grow over time.)
Learning how to save is as important as learning how to invest. After all, if you spend every dime you earn you’ll never have any left to invest. For very young children, you can give the gift of three banks (or labeled jars) — one each for saving, spending and charity.
They’re not going to understand every nuance of finance at a young age. What’s important is that saving becomes automatic. The younger this happens, the better, according to financial writer Mary Hunt.
“You don’t want to start this (discussion) three weeks before college,” says Hunt, author of numerous books, including “Raising Financially Confident Kids.”
For kids 13 and older, consider giving a bank account with a debit card. As time goes by, gradually make them responsible for more and more of their own needs — such as school lunches, gifts, clothing and entertainment.
Provide oversight but no bailouts. If Junior spends his entire month’s allotment on a couple of video games, he’ll have to pack his lunch for the rest of the month and maybe skip a birthday party because he can’t afford to buy a gift.
“The only way to raise kids to be financially responsible is to allow them to make their own decisions and then to live with the consequences of those decisions,” Hunt says.
Bottom line: You can buy nothing but toys that a kid may play with for a while and then forget, or you can make at least one holiday present a gift of knowledge. Don’t expect profuse thanks right away, but do keep in mind that the money lessons you teach can have a lifelong impact.
What ways do you think work best for teaching kids about money? Share with us in comments below or on our Facebook page.