Teach Your Kid a Lesson in Investing This holiday season, consider opening up an investment account for a child
By Ben Baden
Posted: December 6, 2010
This holiday season, consider giving your kids a head start on their financial future with a lesson in personal finance. By opening up an investment account on their behalf—or even just buying them a share or two of stock—you can help them get started investing at an early age. It's also a good opportunity to educate your kids about personal finance and help them begin saving, whether it's for their first car, college, or even retirement.
First, says Richard Barrington, personal finance expert at Moneyrates.com, "figure out how you envision the recipient using the money." Then evaluate investing options to find the best fit for your child. Here a few ways to get your kids started investing:
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Individual stocks and bonds. Buy your child a share of stock or a savings bond from the U.S. government. If you go the stock route, Barrington suggests choosing a well-known, large-cap company like Coca-Cola that has strong fundamentals and prospects for growth. It helps to also choose a company that kids recognize and can relate to.
Norm Mindel, managing partner at Forum Financial Management in Chicago, says giving your children stock can be a good idea, but it can also be a complicated process. He suggests opening up a brokerage account for a child in your name and investing some of your money on their behalf. You can track the stock's progress together, then eventually hand it over to them when you think they're ready to handle their own finances. The other option is to open an account in the child's name. Once they're no longer a minor—generally 18 years old but sometimes older, depending on the state—the account will be theirs.
See 7 Money Tips for Twenty somethings.
Mutual funds. It can be difficult to build a balanced portfolio for a child with individual stocks and bonds. Mutual funds offer more diversification because they invest in a basket of different securities. Barrington recommends the Manning & Napier series of objective-based funds, which he invests in. Each fund has different stock and bond weightings suited for various risk tolerances and time horizons, and these allocations are modified over time. Other fund options include Vanguard STAR (symbol VGSTX) and the T. Rowe Price Spectrum Growth (PRSGX), which both invest in a handful of underlying actively-managed funds, providing instant diversification. They also have low minimum investments: Vanguard STAR only requires $1,000 upfront, and Spectrum Growth, like dozens of T. Rowe Price funds, require nothing upfront—just a commitment to set up an automatic contribution of at least $50 per month.
Another kid-friendly option is the Monetta Young Investor fund (MYIFX). Half of the fund is invested in the S&P 500 via exchange-traded funds, and the other half is invested primarily in a mix of what manager Bob Bacarella calls "best of breed" companies, which are typically well-established companies that tend to have high dividend payouts (think McDonalds and Apple). Investors can buy the fund with as little as $100 upfront if they sign up for an automatic investment plan of $25 per month. "I think it's important that people set up the automatic investment plan because that's the key to accumulating wealth, especially when saving for college," Bacarella says. Monetta will also send your child investment-related advice and games to help them better understand how the markets work, and investors get tuition reward credits each year on their birthday. These credits are as good as cash at 250 colleges—and counting—throughout the country.
See Teaching Your Child Money Habits for Life.
ETFs. Exchange-traded funds are similar to index funds, but they trade on a market throughout the day like stocks. ETFs typically have low annual fees, and many provide broad diversification in a single fund. It's also becoming cheaper to invest in them, as Charles Schwab, Vanguard, Fidelity, and TDAmeritrade all recently announced commission-free ETF offerings. Funds to consider include Schwab U.S. Broad Market ETF (SCHB), which gives investors exposure to the entire U.S. stock market with a basket of 1,400 stocks of small, midsized, and large companies, and charges an annual fee of just 0.06 percent. To give your child exposure to stocks throughout the world, you might consider Vanguard Total World Stock Market ETF (VT), which charges an annual fee of 0.30 percent and invests in more than 2,000 stocks in the United States and abroad.
See Fundamental ETFs Go Beyond Index Investing.
529 plans. Give your child a head start to saving for college with a 529 plan. The account will be in your name, so you'll decide how to allocate the money. "If you can help your kid get through college without building up a lot of student loan debt, then once they start working, then they'll be able to start right off the bat toward saving for retirement," says Barrington. As with individual retirement accounts (IRAs), the money in 529 plans grows tax-free. The withdrawals are also tax-free, as long as they're used for college expenses. Another plus is that anyone—parents, grandparents, even friends outside of the family—can contribute to the plan on behalf of the beneficiary.
See 5 Things You Don't Know About 529 Plans.
Roth IRA. While 529 plans are strictly for education purposes, Roth IRAs are for retirement savings. To open a Roth IRA, you must have some income, so this is a gift for an older child who already a job. Some firms allow minors to open IRAs, while others require that their clients are older. Both Roth IRAs and traditional IRAs offer tax-free growth, but Roth IRAs also allow you to withdraw money from your account, tax-free, after age 59½. Your children will have to open up the account on their own, but after that, parents or grandparents can deposit money on their behalf, Mindel says.
See Consider Converting to a Roth.
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