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  • Writer's pictureRyan M. Vogel, CFP®

Teaching Kids About Saving, Investing, and Risk  

Key Takeaways
Savings
  • It’s never too early to discuss smart money decisions with the young people in your life. 

  • Ensure they don’t simply stash money away without a clear purpose or goal in mind.

  • Different strategies are necessary for achieving short-term, medium-term, and long-term financial goals.

  • We're here to help you discuss financial topics with your children and grandchildren. 


I've practiced financial planning for over 20 years. A common theme I've noticed is the gratitude from clients when I provide sound financial advice to their children and grandchildren. Parents and grandparents are eager to instill good money habits in the next generation. Equally important to me, is imparting these lessons to my children, aiming to steer them toward making wise financial decisions from an early age.


My 13-year-old son Reid has amassed a substantial amount of cash from his allowance and gifts despite not working yet, he's diligent about saving. Knowing my profession, he's been seeking advice on how to grow his savings. With an eye on future expenses like car ownership, Reid is eager to be financially independent. Here's the investment advice I shared with him recently:


Step 1. Learn The Difference Between Saving And Investing.

Invest

I recently got Reid the Greenlight app, a banking app and debit card for kids and teens with parental supervision features. It helps children budget, save for goals, and learn basic investing. What I appreciate about Greenlight is how it allows kids to manage separate savings and spending buckets. Parents can transfer money like allowances and gifts directly from their checking accounts to their child’s account. Apps like Greenlight also cater to kids' preference for using cards over cash, offering convenient money management and parental monitoring capabilities, including the ability to restrict access when necessary.


I also told Reid to make sure he’s not just saving to sock away money. You want to be saving with a specific purpose in mind.


Reid is a great saver, and we encouraged him to enjoy some splurges while maintaining a balance. He's passionate about basketball and collecting cards, so I reminded him not to invest all his savings. I suggested setting aside a portion each week for fun activities like dining out with friends or buying basketball cards. It's important for him to enjoy life while learning how quickly splurges can impact his monthly allowance.

 

Looking ahead, Reid knows he can start working for a W-2 paycheck in Pennsylvania when he turns fourteen. He’s extremely excited to get a job locally and start earning his own money. So, I emphasized the importance of saving for short-term needs, but investing for long-term goals.  


Step 2. When Investing, Use The Best Account Type For The Goal.

Reid’s goals are as follows: 

  • Short-term savings for basketball cards and fun with his friends.

  • In three years, he wants some cash available for expenses associated with a car. 

  • In ten years, he wants some money available for his first apartment. 

  • In more than ten years, he isn’t sure what his goals will be but wants to start saving. 

Long term short term

I’m also explaining to Reid the different types of investment accounts available and the importance of minimizing taxes when investing. For his short- and intermediate-term goals, I’ve established a custodial brokerage account, where he can invest his money. For his longer-term goals, I’m teaching him about a Roth IRA. I’ve explained that Roth IRAs allow your money to grow tax-free until retirement but can allow you to withdraw some funds earlier in your life if you need the money.  


For parents and grandparents, funding a Roth IRA for your kids is a great way to gift because you can match their working income. For instance, if your child earns $3,000 from a summer job, you can deposit $3,000 into a Roth IRA in their name. Those funds will grow tax-free for the next several decades as the magic of compounding turns that money into a sizeable sum.


In Reid’s case, if he earns $3,000 in W-2 income, I’ll contribute $3,000 to his Roth IRA and we will discuss the best way to invest cash in that account. The $3,000 that he earned will be earmarked for his goals that have a shorter timeline.  


Step 3 – Investing Vs. Speculating.

As mentioned earlier, the Greenlight app has some basic investing tutorials that prompted Reid to ask me questions about investing. I was more than happy to do that of course, but I wanted him to understand that investing is different from gambling and speculating. I explained that the longer you invest properly, the greater your chances of success.

 

When discussing investing with Reid, I emphasized the distinction between volatility and permanent loss. I explained that investing heavily in a single stock or a few stocks carries the risk of underperformance or even bankruptcy, potentially resulting in a complete loss of capital. On the other hand, spreading investments across a diversified portfolio of many companies significantly reduces this risk.

Diversification

While Reid is planning to purchase some individual stocks that he’s interested in, the bulk of his investments are going into diversified portfolios through ETFs and mutual funds. I’m teaching him that his stock investments will always go up and down, but because he’s spread out his risk, there's an extremely low probability of it going completely to zero. “Be patient,” I told him. “Investing isn’t supposed to be exciting. Investing done right should be like watching paint dry.”   


We also covered the importance of assessing risk and considering the timing of investment needs. We discussed concepts like risk tolerance, capacity, and specific requirements. For instance, since Reid will need money for his first car in just three years, it's wise to avoid high-risk investments. Bonds and other fixed-income options are more suitable for short-term goals like this. On the other hand, for goals ten years or more in the future, investing in stocks can be advantageous due to their potential for higher returns.


These concepts of time horizons, goals, and risks apply to all our clients, but they’re especially important for younger people to grasp before they start earning real money. While speculating might be more exciting to some, my priority is to teach my son how to manage his hard-earned money wisely. That way, he can have the satisfaction of achieving his goals and not have to worry about having “enough.” The concept of having enough is another lesson I plan to talk to Reid about in the future. So much to teach. I’m grateful Reid is willing to listen. 


Conclusion

The lessons I am teaching Reid are pertinent for us all, but if you are concerned about how your money is being managed and want to make sure the wealth you leave your descendants is managed wisely, please don’t hesitate to reach out. We are happy to help.




 

 RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth 

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