It is nice to give wealth to grandchildren. But an even better gift can be to teach them how to multiply and manage their wealth the rest of their lives.
Youngsters today are more financially savvy than any prior generation. They own investments, have such high discretionary income that retailers pitch to youngsters, and even financial services firms are catering to the younger generation. It is easier than ever to get your grandchild or child started with an investment program.
- The National Association of Investment Clubs (NAIC) has a youth membership program for those under age 18, which now has over 3,000 members.
- Charles Schwab & Co. recently began its Gift Package program that allows adult relatives to open brokerage accounts for those under age 18 with an initial balance as low as $500. The normal minimum opening balance is $5,000.
- Several mutual funds cater exclusively to young investors, including American Century Giftrust and Stein Roe Young Investor’s Fund.
Despite this attention, money, and information your grandchildren know just enough to be dangerous to their wealth. That’s where you come in. You can help them become better, shrewder financial managers. An additional benefit is that the grandchildren will learn to be responsible for something. Kids tend to like some responsibility, and that rubs off in other areas.
Here are some steps to consider:
- Open basic accounts for the youngsters. You want them to learn to both save and invest.Start with a savings account. It could be an account at a local bank or a money market fund that is easy to access. You can put in the start-up capital to meet the minimum investment amount, but tell the grandchild that the start-up money is yours or is available only for college. Review the account statements with the grandchild from time to time, so that he or she can see how the money grows just by being left along in the account.
- Use the account to teach the youngster to save for the long-term. For example, you could say that only up to 20% of the balance can be spent, and the rest is being saved for college. Also, instead of depositing gifts to the account that your grandchild doesn’t know about, give money directly and encourage him or her to save all or most of it.Some people prefer separate accounts – one for spending money, one for long-term expenses such as college, and maybe another for other expenses. Each time the child receives money, part is put into each account.
- Give simple lessons to the grandchild. Explain how compound interest and regular savings work, using examples and explanations that the child can understand. Many brokers and mutual funds have education materials that you can adapt to explain a point. You also might read The Richest Man In Babylon, a classic in explaining savings and compounding of wealth.
- Encourage the grandchild to save by offering to match new savings with additional gifts to the account.
- Help the grandchild pick stocks for a hypothetical portfolio. You can make it a game, but the child will learn and might become more interested. Over time, review the selections and how they performed.
- Buy mutual funds in the investment account. Teach the grandchild how to check prices in the newspaper or on the Internet. When the reports from the mutual fund arrive, you can use these to show the grandchild which companies the fund owns and how it has affected the price.
- Buy a few stocks with the grandchild. This is how the grandchild learns to think like a business owner. When the company reports arrive, the grandchild won’t be able to understand most of them. But you can point out some highlights, such as descriptions of the company’s activities and how a few key numbers changed over time.
Your grandchild needs to save and invest for a lifetime. You can get them off to a good start with a few easy steps and some early lessons on how wealth works. With any luck, the grandchild won’t forget the lessons.