There’s a recurring question I field from time to time, and it has to do with investments for kids. How do you train them? When do they start getting their feet wet re: investing? How can they experience the fact that invested money tends to grow? Well let’s DISCUSS, shall we?
Train up a child in the way he should go, and when he’s old, he’ll not depart from it.
-Proverbs 22:6 (the Bible)
We’ve all heard that we should “train up our child”, and you probably think “I should tell my child about God’s heart and God’s ways” when you hear that old proverb. Well yes, you SHOULD do that- as a matter of fact, it’s THE most important way you should train your child! Developing spiritual capital in your child (i.e., wisdom and skill in how they think and act concerning God, his Word, and the invisible world of the spirit) is the premier category in which you should train your child.
But it shouldn’t stop there! You should also “train up your child”:
- RELATIONALLY: Does your child know how to make a friend? Know how to speak to adults (look them in the eye, address them by name, and offer a handshake for goodness’ sake! Where did THOSE skills go?)? Stand up for themselves when wronged? Defer to authority figures? Give grace and forgiveness easily? Handle conflict fairly, while minimizing emotion? Etc. etc.
- PHYSICALLY: Does your child know what a healthy meal is? Could they look at a day’s worth of food and see what the outages are? Do they feel that exercise is a good and beautiful part of life? Do they love the outdoors? Are they affectionate and ready to play physical games? Have they been challenged physically and know how to give their all?
- INTELLECTUALLY: Does your child have a robust worldview that invites them to evaluate beliefs and ideas around them based on Biblical Truth? Do they enjoy reading? Can they hold a thought in their head through a discussion or lecture? Do they know how to take notes? Are they skilled at memorization? Are they intellectually curious, and do they expect to be rewarded when they are? And so forth.
And finally, your children are to be trained up FINANCIALLY. We happen to think that’s pretty important around these parts. And we’ve invested a bit of time in equipping you to do just that.
But the specific question is, how do we train our children to faithfully invest their money? This one simple activity seems beyond most Americans, for several reasons:
- Investing is all about delayed gratification. That is to say, there isn’t a payoff RIGHT NOW for the decisions I’m making- more so, I’m trading away even the possibility of all the good, enjoyable outcomes I could otherwise be experiencing. I’m saying NO to some good right now by saying YES to MORE good in the future. (This is a pretty strong Biblical definition of maturity, BTW.)
- Investing can actually invite pain or discomfort in your life. Almost everyone lives with some kind of financial debt and, instead of doing the simple thing and getting rid of all debt (say, mortgage debt, which we generally see as a good thing), an investor chooses the more complex road of balancing debt (hopefully, “cheap” debt with lower interest rates) with investments (hoping for high rates of return than the interest on the debt you carry). It’s much simpler to have zero debt and zero investment returns… but we’re not out to develop simple children. We want children who can make mature financial decisions and carry reasonable financial responsibility.
- Investing assumes that you’re living below your means. That is to say, you’re not engulfed by a budget that’s heavy on spending and light on income. A precursor to investing is that you have some money left over at the end of a month’s spending!
So investing is rather rare air for the normal American. But not so with your children! You want them equipped, responsible, and MOTIVATED to invest! You want the concept of investing one’s money to be so normalized in your family that it’s a working assumption instead of a considered decision.
YES YES WE KNOW ALL THAT. YOU SEEM NOT TO BE HEARING US, SO LET’S ASK IT ONE FINAL TIME, BRO:
HOW do we train our children into the habit of investing their money?
Right right–the question at hand. Yes. Well this is a subject we’ve touched on in various spots here on Abraham’s Wallet, but there are several ways for your children to experience investing while you talk them through its benefits. To wit:
- Open up an IRA for them, and do so early. We’ve discussed this neat feature of owning a family business: your children are allowed to work for your business at any age, so long as it is 100% owned by mom and/or dad (think: paying them the market rate for any legitimate work that they do for your business). In doing so, they create earned income, which enables them to put up to $6,500 of that earned income into an IRA (no earned income = no IRA). Remember: money invested young is worth so much more than money invested later in life. If a child knows they’re earning money for their future (by, say, cleaning the family office and being paid a market rate for it), then seeing that money grow can be awfully motivating. If you’re not entirely comfortable with the rules when it comes to this process, please work with a qualified financial professional as mistakes can be very costly. Much like:
- The Bank of Dad. This great idea gives children a feel for market investing while paying them a better-than-market return for their money. “How can that happen!?” you may well ask. “Why, YOU pay them for ‘investing’!” is my joyous reply. The mechanics for the BoD are simple:
- Young Billy hands over his precious dollars to Dad.
- Dad shrewdly puts those dollars into an interest bearing savings account (like this one).
- Then dad, on the sly, tops up that account with his own dollars. He does this to the tune of, oh, 10% per quarter? (We would be happy with 10% a year… when coupled with the rate on the savings account, this would bring Billy’s earnings to 15% a year at the Bank of Dad! Hey now!) The important activity when using the BoD ISN’T the money growth, however- it’s taking the time to…
- Print out statements, compare them with old statements, and actually demonstrate to Billy how that money is growing (and maybe do a projection for him, as well). Over time, Billy will be educated (nay, enculturated!) into the experience of compound growth, and healthily indoctrinated into the lifelong habit of investing.
- Open a 529 Plan. But don’t JUST think of that 529 savings money as being for Suzie’s college. Think of that money as “Suzie’s family’s education fund“. If for some reason Suzie doesn’t use the 529 money that’s been invested for her (say, she goes to a trade school, or wins an athletic scholarship, or skips university altogether), you have several great options. With the Secure Act 2.0 that was passed this year, after a 529 has been open for at least 15 years, up to $35k of the balance can be moved into a Roth IRA for Suzie (which can easily grow to over $1 million by the time Suzie hits retirement age). Alternatively, she can keep the funds in the account and the beneficiary on that 529 can be someday be changed to Suzie’s own children. Imagine investing money, expecting to spend it in 10 years, but instead, allowing it to grow for 40 years! That will be amigo money by the time your grandchildren use it. Think Suzie will be happy? Think she’ll be motivated by that account which is going to significantly alleviate future financial pain for her family? Think she might want to train her own children someday in the skill of investing? I do.
- Pay an allowance… with a catch. We don’t universally recommend paying children an allowance (Rewarding them for regular work that benefits the family? Great. Giving them money for living under your roof and eating your food? Not great. Putting some dough into their hands so they can practice stewardship? Yes. Showing what a big spender you are by stuffing your kid’s pockets while expecting nothing of them? No.), but we know it can have its uses. If you do pay your children an allowance (again, as a reward for mutually beneficial family work), put stipulations on it. Make them give some of that money to a charity (of their choosing). And PLEASE make them save/invest some of that money! From the earliest possible age, teach your children that money that comes into their hands isn’t JUST for spending: it’s for saving, giving, and THEN spending.
- Open up your books. This is the big one. At the right time (age 13? 18? 30? …all depends on the child’s level of maturity), involve your child in the family’s financial picture (remember, this isn’t YOUR financial picture… you’re a steward of the FAMILY’s finances… and they’ll one day be handed off to the next generation- WHICH YOU’RE TRAINING!). Show Billy and Suzie (and Max and Geraldine and, yes, even Toby) the family’s annual returns. Help them understand why some money is over here (“That’s our 401K, which mom and I will live off of when our earning days are over”) and some money is over there (“That’s our emergency fund, which we keep liquid in case something big an unexpected happens”). As your children understand the family’s finances–and watch them grow year over year–they’ll understand the rhythm of investing and want to do the same when they mature and become the family leaders. I guess another way of saying it would be:
Train up a child in the way he should go, and when he’s old, he’ll not depart from it.
-Proverbs 22:6
