Investing basics for kids: How to teach children to save and invest in 2023

One of the best ways to build wealth over time is to invest — and starting at a young age can improve the chances of success down the road. However, even though 39 percent of children have a savings account, only 6 percent have an investment account where they hold stocks, mutual funds or ETFs, according to a 2022 survey from T. Rowe Price.

If you want to set your children up for future success, helping them learn about investing can be a good step forward. In fact, a December 2022 Bankrate survey found that investing more or boosting retirement savings is the biggest financial goal for about 1 in 7 Americans. Even if you don’t know much about the subject, you can still teach kids the basics of investing, and maybe even learn a little along the way.

Top reasons to begin investing as a child

Most people don’t think a lot about investing as a child, but there are plenty of reasons why it makes sense to get started early. Here are some top reasons to get your children started with investing.

Developing good saving habits

Habits get ingrained early, so teaching kids about saving and investing while they’re still young can have major benefits for them down the road. Help them understand that money is earned through work and is needed for necessities such as food and housing. If there’s something they want, consider teaching them about the importance of saving by giving them an allowance that forces them to save up for the item over time.

Learn how to take risks

Children can also learn lessons from the risk involved with investing. Some investments have very low risk but offer returns that are also quite low. Other options, such as stocks, come with higher risk but also have the potential for strong returns. One of the best ways to learn about these differences is by having real money on the line and seeing how your investments perform and how you react to the gains or losses. Kids might get a sense of their risk tolerance, which can help guide them throughout their investing lives.

Compounding returns

One of the biggest benefits of getting kids started with investing is the opportunity to earn compound returns over a very long time horizon. For example, if a child is able to save up $1,000 and invest it when they’re 10 years old, it would be worth about $189,000 when they’re 65 years old or nearly $790,000 when they’re 80 years old, assuming 10 percent annualized returns, about the average return on the S&P 500 index over time. Those numbers should get the attention of even the most rambunctious child.

The table below shows how much a child would have at age 18 or 25 if monthly contributions began at their birth, assuming 10 percent annual returns.

Note: Assumes contributions were made at the beginning of each month.

More time to recover from losses

Another benefit of investing early is that kids have that much more time to recover from inevitable losses. Depending on the goal they’re investing for, kids will potentially have many decades to invest, giving them plenty of time to gain back any short-term losses that may come due to market selloffs or economic difficulties. Having a long-term mindset is an important part of being a good investor and kids are uniquely positioned to understand this concept. No one’s time horizon is longer than a child’s.

Reach financial security sooner

Getting kids started with investing may also increase the chances that they reach financial security sooner than they would if they started later in life. Compound interest grows over time, so if you have a 10- or 20-year headstart on most people, it’s reasonable to think that you’ll get to the finish line faster too. Someone who is an aggressive saver as a child and continues to be one early on in their career will likely be in a strong financial position when it comes time to retire and may even be in a spot to retire early.

Best investment accounts for kids

• Custodial Roth IRA – A Roth IRA is one of the best options for saving for retirement, and if your child has a paid part-time job, they may qualify for a custodial Roth IRA. The parent who opens the account manages the money until the child is age 18, or 21 in certain states. The account’s value can grow tax-free and contributions can be used for expenses that pop up down the road, while contributions and earnings can be withdrawn penalty-free for qualified educational expenses.
• 529 education savings plan – A 529 plan is similar to a retirement account, but instead of saving for retirement it allows you to save for a child’s future education. Your money is allowed to grow tax-free and withdrawals are tax-free as long as they’re used for qualified education expenses. You may even get a tax deduction for contributions depending on the state you live in. You can open an account through most online brokers or robo-advisors.
• Custodial trust account – This type of account, which is also known as a UGMA or UTMA trust account, is opened by an adult for the benefit of a child. The adult is the custodian of the account until the minor reaches a certain age, typically 18-25 years old, depending on the state. The accounts have more flexibility than a 529 plan, but don’t come with the same tax benefits.
• Brokerage account – Some brokers allow minors to open their own brokerage account, giving them ownership of their money and investment decisions. Fidelity’s Youth Account allows kids aged 13-17 to open an account with no fees or minimum balances and start saving and investing. Fractional shares allow them to get started investing with as little as $1. A brokerage account is taxable, so they’ll have to pay taxes on any income or capital gains they earn, however.

Start with saving and how to manage money

Before you tackle investing with your children, it’s a good idea to start with basic financial concepts like saving and spending.

“Even toddlers can understand the concept of a budget,” says Moana Whipple, former financial associate with Natural Bridges Financial Advisors.

Whipple and her partner started teaching their three-year-old child about budgeting by giving her a YouTube video allowance and using a whiteboard to illustrate. Each time she watched a video, they marked off a box on the whiteboard.

“She quickly grasped that if she watched four videos before naptime, she only had one left for the rest of the day,” Whipple says.

Once children understand this concept, you can layer in additional age-appropriate money management concepts.

“Introduce banking and savings accounts to kids as they grow, so they learn where to hold their money easier,” suggests Robert Farrington, MBA, the founder of financial education website The College Investor. “There are many products and services designed to help tweens and teens that allow for debit cards and money management help, with parental controls.”

By the time your child reaches high school, Farrington says, they should have a checking account (jointly with you) with a debit card and set up direct deposit for paychecks they earn from a job.

Explain the basics of investing

Once kids have a handle on basic money management, it’s probably a good time to help them learn about investing and show them how it works.

To start, begin with the basics of investing, including explaining that a stock — or share of a company — allows them to have ownership in that company. If you have an investment portfolio, show your child how it’s grown over the years through compounding returns.

Consider explaining that it’s possible to reduce some of the risk by using some of the best index funds to get instant diversification, rather than trying to figure out how to pick the “right” stock.

Whipple suggests using toys as an example of watching out for trendy investments that might not have staying power.

“Kids know what it’s like to get caught up in the hype of a new toy, like beyblades, that doesn’t last,” Whipple says. “Relating it to toys and fads makes the idea more tangible.”

On top of that, gifting stocks can let them make some of their own choices and mistakes along the way. Websites like Stockpile make it easy to give fractional shares to children, once you set up a custodial account.

Farrington points out that his parents opened an account for him when he was a baby and gave him access to some investing choices and portfolio-tracking tools as he got into high school. Even starting with $100 can be a good way to learn how to grow wealth, he says.

Open an account for your child

One of the best ways to get children started is to open an account on their behalf. While minors can’t have their own accounts, Farrington points out, it’s possible for you to open a custodial account. Stash, Stockpile and Acorns all allow you to save on behalf of your child, and Wealthfront even offers the ability to save for college using a 529 plan.

Whipple suggests opening a custodial Roth IRA allowing kids to invest early on — with tax benefits.

“If your child has earned income from babysitting or some other job, they can contribute to a Roth IRA, up to the amount earned,” Whipple says. “This is an ideal [type of] account for kids investing since the earnings grow tax-free and the account can be tapped early for things like a first home purchase.”

In order to open an account, you’ll need your own information, including your Social Security number, as well as your child’s legal name and Social Security number. Whipple points out that the custodial account reverts to the child when they reach the age of majority in the applicable state, usually at age 18 or 21. Once that happens, the money becomes theirs to control.

Continuing the investing lesson: How to keep kids engaged

Teaching kids about investing shouldn’t stop once an account is open. Farrington says there should be an ongoing dialogue about the child’s investments, including discussions about losses, gains and mistakes.

It’s also possible to use stock simulators and other tools to try out different scenarios. However, the best lessons are about consistency and how money multiplies, Whipple says. Letting kids see how money makes more money can get them hooked on investing and teach them the importance of developing the habit of investing early on.

Investing for children by the numbers

Bottom line

The earlier you can get your kids investing, the more likely they are to develop better financial habits and build wealth over time.

“You might be surprised at how much kids can understand, especially if you layer different strategies starting at a young age,” Farrington says. “Don’t wait to help them start building a nest egg. They’ll appreciate it later.

FAQs about investing for children

• How old do you have to be to invest in stocks?

  Typically, you need to be 18 years old to open a brokerage account, though some brokers have started offering accounts to teens. Custodial accounts can be opened on your behalf prior to age 18, but an adult will have ownership over the account until you’re an adult.
  

• How can you buy stocks as a gift?

  Stocks can be purchased as a gift and then transferred to the recipient’s account through a broker. You can also purchase stocks on behalf of a child through a UGMA Trust account.
  

• What is the best way to invest for a child?

  The best way to invest for a child will depend on your unique circumstances and what your goal is. A custodial Roth IRA can be a great way to kick start their retirement savings if they qualify for an account, or a Custodial trust account can help you get them started with investing until they reach adult age.
  

• How can you teach your children about investing?

  One of the simplest ways to teach kids about investing is to talk to them about money. Money is often thought of as a taboo subject, but talking with kids about saving and spending decisions can help them understand how money works at an early age. If you have an account for their college education, consider sharing statements with them to show the progress that is being made over time.
  

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.