During my late teens, my mother gave me two worn, blue, passport-sized books detailing my custodial investment accounts. I had no idea what to do with them, but it didn’t matter because the accounts were empty anyway. Probably for the best, because I’m almost certain my assets wouldn’t have stood a chance.
Now that I’m a mom, I’ve opened a custodial account for my 4-year-old son, and I often think about how I can prepare him 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 experts have some ideas.
SHARE MONEY VALUES EARLY
Preparation starts 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.
Something I’ve started doing with my son is teaching him the value of giving, encouraging him to give toys away before buying new ones. One approach Livadary recommends for teaching the value of money is to assign what she refers to as a “job description” for every dollar you give your children.
“One of my favorite things is taking dollars and allocating them in ways that are really aligned with values,” says Livadary. “So let’s say you get $3 a week — $1 to give, another dollar is for savings, and the other dollar you can spend.”
LEARN THE BASICS OF INVESTMENT
A custodial brokerage account is an investment account opened by a parent or guardian for a minor until they reach the age of majority.
If your child has a job with taxable income, you can also help them open a custodial IRA or Roth IRA.
One good thing about custodial accounts is that although children don’t control the accounts until they reach adulthood, you can tell them what’s going on.
Michael Costello, a retired consumer products executive based in Miami and a parent of three, says he prepared his now-grown children to manage their custodial accounts by teaching them about budgeting and saving early. He also allowed them to view their investment accounts and watch them grow, and he facilitated investment discussions with them.
“We ended up having a lot of conversations about why do you hold long? What should you be looking at? What are ETFs versus regular stocks? What do bonds do?” he says.
Teaching his children about mutual funds and other assets made him sure they had access to custodial accounts when they turned 18.
There are many ways to teach your children about the power of investing. Helping them understand what compound interest can do for every dollar they invest can motivate them to invest for the long term. If you think they are ready to start trading, some brokers offer youth accounts that allow teenagers to start investing with parental supervision.
SET GOALS AND LEARN DELAYED GRATIFICATION
Delayed gratification is an important adaptive skill parents can teach children to manage custodial accounts, says Anna N’Jie-Konte, a CFP and founder of Dare to Dream Planning in New York City.
Since custodial accounts are brokerage accounts that can be used at any time, it’s important for children 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 now.
“I think one of the superpowers of people who are really financially successful, and a period of just being successful, is when they have the ability to say, ‘I understand that I want this now, but it will be so much better if I wait and if I continue,” she 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 why I don’t think the investments in my custodial account would have lasted long. For the record, my financial plan was to become a rich actress and finance all of my life’s expenses that way.
When setting financial goals with your children, it’s a good idea to set both long-term and short-term goals. Why? Some people just aren’t inspired by financial goals that are too far in 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 OK. That’s their version of a life they’re excited to live,” she says.
TRUST THE PROCESS
It’s also okay for your kids to make mistakes with money—they can be learning moments, says Costello.
“You can’t hold them back and baby them, you have to give them control, they have to make some mistakes and then over time, they kind of figure out how to manage their money better.”
If, despite their preparation, you feel that your children are not ready to manage their own assets, another option is to transfer some of their assets to a trust where you can retain control beyond adulthood.
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 writer at NerdWallet. Email: [email protected]
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