Do you talk to your kids about money? When it comes to teaching kids about money, I belong in the “early and often” school of thought. Many behavioral habits get started at a young age, and I would prefer my kids form good habits around money and saving before they become adults.
But when should kids start investing?
I think it’s important to start early — when it comes to investing, time matters a lot. Invested money compounds over time, and the longer the money compounds the better off they’ll be.
Experience is also a factor in successful investing, and knowing how to respond to different market conditions helps a lot. Building that experience takes time. Guidance from adults can also help here.
While there is no “right” or “wrong” way to raise kids, opinions vary significantly. I imagine plenty of people will disagree with how we’re raising our kids to be financially astute, but I don’t mind…
Starting With A Piggy Bank
Mrs. Tako and I have two kids, ages 4 and 2. We started them on the path to financial education using piggy banks to learn about saving.
Tako Jr. #1 (our oldest) already understand what money is. He can count small amounts and knows that money can be used to “buy stuff”.
Whenever Tako Jr. #1 asks me to buy a ridiculous toy or candy, I tell him, “I won’t buy that for you, but you can if you have enough money saved. Then you can choose to buy it.”
I’m trying to instill the lesson that money gives them the power to do what they want in life. Instead of just saying “no”, I leave the opportunity open for them to choose.
My kids are already learning that money gives them control, and saving is necessary to gain that control.
That First Bank Account
Piggy banks are a good place to start saving, but introducing concepts like interest is the next step.
In the United States and Canada there is no minimum age for a child to open a bank account, but some banks do have minimums before an account can be opened — usually in the $100 range. Our bank (Chase) requires a minimum of $25 to open a savings account and will waive any service fees for children under 18.
We’ll open a bank account once they’ve saved enough to reach the minimums. While most banks don’t pay much in interest these days, some online banks do have slightly higher rates.
I have a debate going with myself if it makes any sense to teach kids about physical banking. Teaching kids how to fill out deposit/withdrawal slips and how to interact with a bank teller might be a total waste of time. Should I even bother?
On one hand, most adults already do most of their banking online. I rarely step into a bank branch today. I do most of my banking online.
By the time Tako Jr. #1 and #2 are old enough to do any serious banking, I wonder if physical bank branches will still exist anymore.
Baby’s First Brokerage Account
Piggy banks and savings accounts are of course just practice for the “real deal” when it comes to investing — A brokerage account.
Back when I was a kid, I had absolutely no idea what a brokerage account was. All the adults I knew either didn’t talk to kids about investing, OR they simply didn’t know about investing in stocks. I’m almost certain my parents fell into the latter category. I doubt they even had a brokerage account when I was a kid.
In the United States, the minimum age to open a solo brokerage account varies by state. In some states the minimum age is 18 years old, and in other states it’s 21 years old. In Canada, the minimum seems to be 18 years.
However, a child and an adult can open what’s called a custodial brokerage account (also called a UGMA/UTMA account) when they’re under the local minimum age. This is the kind of account we’ll open for our kids when they’re able to save up the brokerage account minimums, which are more significant than bank accounts.
Vanguard has a minimum of $3000 to open a account, and Fidelity has a minimum of $2500. Smaller brokerage firms like TD Ameritrade and Merril Edge have no account minimums, but the trading fees are higher ($6.95) and some mutual funds transactions come with commissions ($49.95 for TD and $19.95 for Merril).
Those transaction fees are a lot of money for a kid, and it might be worth waiting until they can save up enough to open a Fidelity or Vanguard account. (Maybe I’ll help with this)
Opening a custodial brokerage account will be a big first step. It will be the first time they’ll have the access to make real investments — stocks, bonds, money market accounts, ETFs, and of course index funds. It’s a really important first step, and I intend to be there to help them with their first investments (We’ll invest in some kind of low cost index fund).
What About An IRA?
While taxable brokerage accounts are good place to start, tax advantaged accounts are even better. In the U.S. this means an IRA.
Roth IRA’s are very flexible tax-advantaged accounts that can even be used to pay for college. Companies like Fidelity offer no-minimum Roth IRA’s for Kids.
(Note: Yes, our kids have 529 college savings accounts. I don’t actually think they’re the best tax advantaged account for kids. Roth IRAs are better!)
While there is no minimum age at which a Roth IRA can be opened, there are child labor laws which restrict a child from working and producing the “earned income” that is legally required contribute to a IRA. The IRS requires that earned income be from a legitimate work situation. Household chores probably don’t qualify, but working at a family owned business is allowed.
At the federal level, the minimum age a child can work is age 14 unless the child works for his or her parents in the family business. Some jobs like delivering news papers, acting or modeling, and babysitting also have legal exceptions.
Children also have restricted work hours at the federal level until they reach age 16.
Some states have stricter regulations, so it’s important to check your local laws. This Department of Labor page has links to all the U.S. state labor offices and various state child labor laws. It’s a good resource.
Allowance or No Allowance?
Investing money is one thing, but how do young kids earn money?
Getting an allowance seems pretty popular. This is a lot like receiving a salary from a job. In some families allowances come with the requirement of doing chores, in other families that same allowance comes without the expectation of work.
We don’t currently give our kids an allowance, and Mrs. Tako and I have a “open debate” about this topic.
Neither one of us received allowances when we were kids, which has us generally set against them. In my case however, I was allowed to earn money by doing chores for my parents.
Instead of hanging out with my friends on the weekend, I was usually chopping wood, painting fences, or shoveling dirt to earn money (at considerable less than minimum wage). It was like being a day laborer. If I didn’t work that day, I didn’t earn any money.
I want our kids to have opportunities to earn money by trading their time (just like adults do). Until they’re old enough to hold a part-time job in their teenage years, the opportunities for kids to earn money are really limited.
We haven’t decided what to do.
Mrs. Tako generally believes that helping around the house is something our kids shouldn’t be paid for doing. They should help around the house without monetary compensation. I can totally see her point – everybody in the household should contribute.
Maybe I can convince Mrs. Tako to go with a hybrid model — some chores are going to be required as part of living in the house, and others will be optional. Those optional chores would be opportunities for the kids to earn some money. It would be more of a contractor model instead of a salary allowance system.
I want to setup our kids for financial success, and that means exposing them to money and personal finance as soon as possible. I didn’t grow-up in a family that talked about money openly, and this is something I really want to change now that I have my own family.
We’ve started talking with our kids about money, and they already understand that saving gives them power. The more they save, the more the doors of the world will open up to them.
Some families try to isolate children from the stress and difficulties of managing finances, but I think this is a HUGE mistake. Money doesn’t have to be stressful — the additional time and experience that starting early brings can only improve a child’s chances of financial success.
Adults (like myself) need to get our future generations setup for financial success. It’s more important now than ever.
How old were you when you first started investing? Did an adult help you get started?
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