Vacation Discussion on Kid's Finance Education:
I recently went on vacation where I met up with some old friends at a Hotel/Resort. After a shared meal where one group covered the meal of another friend's child with a promise to repay before the end of the vacation, the discussion of digital bank transaction services like Venmo helped bring to light a very compelling question- How will we teach our kids traditional money management lessons when there are so many new types of digital transactions available today? The following is a list of steps I am using to help teach my kids about personal finance education.
Finance Topics for Kids:
I want my kids to learn the finance topics that were never discussed in my early years, such as basic money management, wealth creation through the building of assets and reduction of liabilities, tax strategies and many other financial topics. So how do I begin to teach these traditional basic methods when banking transactions are now done from one smartphone to another without paper, without envelopes or jars to store physical currency.
Traditional Teaching of Money:
Some of the traditional methods of learning personal finance include the use of money envelopes or jars, these items teach people to keep their allocations of physical money in separate locations for items like rent, groceries, entertainment and of course savings and investing. The idea here is that people can more easily understand and manage their own budget when they see these physical monthly allocations.
Don't Ask a Banker:
So I went to a credit union to find out the best way to begin teaching my kids about money. My thought here was to obtain a kid's debit, or potentially a limited credit card with a controls in place to limit spending.
Debit Card, Credit Card or No Card:
The brief response from the banker was quite clear. Young children under legal age requirements simply cannot obtain a debit or credit card. I pressed the banker a little more, and he offered one interesting suggestion to simply create another small balance debit card in my name and allow my child to use it. He said he couldn't legally offer this advice, but he had seen it done before with some success. I didn’t like this option so I pressed further.
New Kid's Plan:
The banker agreed with me that parent's should have a way to teach under age kids to be financially responsible using existing bank instruments, he even told me he would discuss a "kid's" program with his management. The banker never called me back, and after some time I called him back- He had not made "appreciable progress" on the topic.
With no success on getting a debit card for my kids, I decided to continue using the methods I had in place to reach the goal of teaching my children financial responsibility.
(1) Traditional Custodial Bank Account:
I setup a simple custodial bank account. With this account we would deposit birthday money, chore income or any other money made by my child. The account included a register for debits and credits. I used this register to teach my son how to enter in these transactions manually.
This account would only act as a launching pad for other accounts, so the ridiculously low interest rate was not a concern. However I did explain to my kids that other long terms savings rates above 2% would be utilized for larger balances in the future.
(2) Kid's Brokerage Account:
After collecting a small amount of savings, I setup a new brokerage account using my existing brokerage institution. Once I created the account online I renamed the cryptic account "BrokerageXYZ212234" to a new name "KidsName". This way when my child sits with my at the computer to watch the progress of his or her brokerage transactions I can point to the brokerage account online and enable them to see their name and therefore their money. (Yes, this is somewhat dishonest, as they don't legally own these accounts, but it is at least a first step)
Kids Stock Picks:
After explaining the benefits of stock ownership versus buying another virtual video game character attribute, or adding virtual money to their other video games I found that my children became very interested in owning the companies and products they enjoy. At this point I moved most of their savings into my new brokerage account with their name showing on the brokerage website.
I explained the benefits of spreading these investments out to different segments, as my child wanted to first go all in on one stock- the maker of the video game RedDeadRedemption. Once we came to an agreement on the best individual stocks to buy, and the benefits of owning index and dividend focused positions we landed on a good mix of stocks that my kids can watch and learn about investing.
Regular Investing Volume:
Another key item that I want my kids to understand is the importance of regular investing. After my kids have completed their regular chores, we give them the opportunity to perform extra chores, which will allow them to earn money. One example is washing both cars, including running the vacuum and cleaning the interior. If done well, this tasks allows them to earn up to $30 dollars. At the end of the month, I move 50% of their hard earned labor into their investment accounts.
This regular movement of money teaches them the basics of regular money flows, and creates a monthly opportunity for them to buy new shares or add to existing shares in their portfolios.
(3) Visit to Walmart and Square Sighting:
The most requested stocks were of course video game makers, clothing brands, big box stores and some consumer staple products. My kids regularly ask to see "Their" accounts to check on the progress. One key learning point arrived on my lap on a recent visit to Walmart. My kids starting making jokes about the store, these were probably jokes they had heard from their school friends. Once we stepped inside I reminded them of one important fact. I stopped them in their tracks with the following reminder, "Are you guys aware that you own a very small piece of this company (symbol WMT) which by the way pays you a 1.89 percent dividend payment, every year."
After that comment they froze in their tracks and started asking questions about their small stock ownership. Suddenly they became very interested in finding the sandals they needed, and they walked around the large store in complete amazement. I no longer hear jokes about this store, and I try to remind the kids about what it means to own a piece, no matter how small of a successful company through a stock purchase.
Square stock (symbol SQ):
The second stock ownership discussion was prompted by a quick visit with my children to a skateboard store. Upon paying a new skateboard helmet they quickly noticed the payment system "Square" on the counter, which we used to pay for the new helmet via my credit card. "Dad", they said, "this is that company that you told me to buy, Square." That's right," I said, "you own a small piece of this company as well." These two examples tell me that the kids are at least aware of the products they own. I couldn't be happier seeing their growth and understanding on the topics I knew nothing of until well after my college years.
(4) Personal Financial Books for Kids:
There are quite a few books on investing that have been summarized for kids. The type of book you choose is largely a personal choice on the type of philosophy you maintain for personal finance topics. Rather than provide any one book, I recommend looking through the list of books I have provided on my website to find one that could work for your kids.
(5) Explanation of Value:
As with all of these financial topics for kids, teaching my kids about value or products or investing is an ongoing and sometimes tenuous exercise. When my child asks for something they want to buy, I ask them to explain the value of the product, where it's made, how much it costs to produce and transport, and what is the wholesale versus retail price. On occasion, this discussion can lead to a deeper understanding of value. I will continue this occasional value discussion so they my kids can learn to make their own decisions.
(6) Final Kid's Message:
Back to my first paragraph on the vacation discussion of kids and money. During this vacation I sat down with my friend's ten year old and explained the definition and importance of owning assets as opposed to liabilities. His dad contacted my from the airport later that day to tell me that his kid wanted to buy a new laptop. His dad reminded him that buying virtual video game skins would not help him to obtain a laptop. Then, the child said, "hey Dad, maybe I should buy some assets instead". What a great ending to this vacation.
In case you are wondering, my kids portfolio is actually beating the S&P500, and yes, it's beating my own portfolio as well.
Whatever system or steps you use to start teaching your kids financial responsibility, my view is that any early discussion on the value and purpose of money will benefit them. Let me know if these steps provide guidance to your situation. Lastly, I look forward to hearing about your specific methods to teach your children about this topic, as it is a very important discussion point in our household, so any feedback and guidance would be helpful.
Note that I am not a financial or legal professional, nor am I licensed to sell securities, or any other financial instruments. Given this statement, I strongly recommend that you consider this blog as entertainment value. Although, I sincerely hope that I can motivate you to learn to build your own financial knowledge and wealth.
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