By ELIZABETH AYOOLA of NerdWallet
During my teenage years, my mother handed me two blue books in worn passport format with the details of my deposit accounts. I had no idea what to do with it, but it didn’t matter, because the bills were empty anyway. Maybe for the best, because I’m pretty sure my possessions wouldn’t have a chance.
Now I am a mother, I have opened a custodial account for my 4 year old son and I often think about how to prepare him to take control of his investments in the future. If you are looking for ways to prepare your child to invest, an experienced parent and financial experts have some ideas.
SHARE YOUR MONEY VALUES IN ADVANCE
Preparation begins as early as possible when it comes to teaching your kids about money, says Cristina Livadary, a certified financial planner and co-founder of Mana Financial Life Design in Marina Del Rey, California. Regardless of your child’s age, you can start by talking openly about finances and sharing your values around money.
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Something I started doing with my son is to teach him the value of giving by encouraging him to give away toys before buying new ones. One approach Livadary recommends for teaching the values of money is to assign what she calls a “job description” to every dollar you give to your children.
“One of my favorite things is to take the dollars and really divide them in ways that are truly value aligned,” says Livadary. “So, let’s say you get $ 3 a week: $ 1 to give, another dollar to save, and the other dollar you can spend.”
TEACHING THE BASICS OF INVESTMENT
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 taxable income job, you may also be able to help them open a custodial IRA or Roth IRA.
A good thing about custodial accounts is that although kids don’t check accounts until they reach the age of majority, you can show them what’s going on.
Michael Costello, a retired Miami-based consumer products executive and parent of three, says he trained his grown-up children to manage their custodial accounts by teaching them about budgeting and saving upfront. He also allowed them to view their investment accounts and watch them grow, and facilitated investment discussions with them.
“We ended up having a lot of conversations about why you hold onto holdings long-term? What should you be looking at? What are ETFs versus regular stocks? What do bonds do?” he says.
Teaching his children about exchange-traded funds and other businesses made him sure they would have access to custodial accounts when they turned 18.
There are many ways to teach your kids about the power of investing. Helping them understand what compound interest can do for every dollar invested could motivate them to invest long-term. If you think they are ready to start trading, some brokers offer youth accounts that allow teens to start investing with parental supervision.
Set goals and teach delayed gratification
Delayed gratification is an important adaptive skill that parents can teach children to manage custody accounts, says Anna N’Jie-Konte, CFP and founder of Dare to Dream Planning in New York City.
Since custodial accounts are brokerage accounts that you can tap into at any time, it’s important for kids to see their investments as long-term money that can offer them flexibility and options in the future, he says. This could help them refrain from spending it now.
“I think one of the superpowers of people who are truly financially successful and only having a successful period, is when they have the ability to say, ‘I recognize that I want this right now, but it will be so much better if I wait and keep doing it.'” , He says.
But for delayed gratification to work, it’s important to have financial goals and a plan, which I didn’t have as a teenager, and because I think the investments in my custodial account wouldn’t last long. For the record, my financial plan was to become a wealthy actress and finance all the expenses of my life that way.
When setting financial goals with your kids, it’s okay to set both long and short term ones. How come? Some people are simply not inspired by financial goals that are too far into the future, says Livadary.
“Sometimes it’s buying a house in the next three years, but sometimes it’s taking a vacation… and that’s okay. This is their version of a life they’re excited to live,” he says.
Trust the process
It’s also okay for your kids to make money mistakes – they can be teaching moments, says Costello.
“You can’t hold them back and pamper them, you have to give them control, they have to make mistakes and then, over time, they understand how to manage money better.”
If, despite the 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 remain in control beyond the age of majority.
This column was provided to the Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Elizabeth Ayoola is a NerdWallet writer. Email: firstname.lastname@example.org.