How to Teach Kids to Manage Their Own Investments

When your kids are young, you manage a lot for them, from after-school schedules and doctor’s visits to their financial accounts. Minors can’t own stocks or other investments outright, but the longer money is invested in the market, the more opportunity there can be for those investments to grow. Parents can give kids a head start on investing by opening an investment account on their child’s behalf and managing it until they come of age. In the case of a Uniform Gifts to Minors Act (UGMA) account, that’s generally around age 18.

Of course, once your child is old enough to manage their own investments, you’ll want them to have a smooth transition into this responsibility.

In addition to talking to your kids about money regularly, you can make a habit of teaching your child how to take control of their investments one day. In both cases, little actions over time can lead to a big impact.

Investing Lessons to Teach Children

Kids can start learning about investing as early as age 8, according to some experts. Here are some concepts you might introduce to give your child a foundation (in addition to an investing glossary to help you understand key concepts, too).

Risk tolerance

Risk tolerance describes your willingness to accept the possibility of a negative outcome (e.g., losing money on investments). Any investment involves some degree of risk, but you can modify your portfolio to suit the level of risk you’re comfortable taking.

With young children, you might start a conversation about risk tolerance without initially discussing money. Instead, talk about how your child approaches risk—are they first to raise their hand or audition for a play, or do they tend to hang back? At a restaurant, would they try a new dish, or stick to a tried-and-true order?

You can explain how taking risks can offer more opportunities for bigger rewards, but also carry the possibility of failure. The longer you have to keep trying (e.g., having a longer time horizon with investments), the more you might be willing to take some risks to pursue a potential opportunity.

Types of investment

Kids can’t hold an investment in their hand the way they can see and feel cash. You can help make investing more concrete by explaining different kinds of assets.

Stocks represent a share in a company. When the company does well, the value of a stock goes up. If a company’s value drops, so do the shares investors hold. Young kids may already have favorite companies (e.g., Disney). You can use these as examples to show how investors might choose stocks they think will perform well. We’re not saying you should go out and buy Disney stock, but simply that talking about brands kids recognize can help solidify the concept.

Bonds are debt securities, or essentially a loan from the investor to a corporation or government agency. Unlike stocks, which derive value from company growth, bonds generate returns by paying interest at regular intervals. Bonds are generally less volatile than many stocks, and U.S. Treasury bonds are backed by the full faith and credit of the U.S. government.

Many investors choose to invest in funds that pool multiple securities, instead of picking each security individually. Investment funds include exchange-traded funds (ETFs) and mutual funds. This can be an easy way to diversify your investments, which can help reduce the risk of losing a significant portion of your portfolio’s value if a particular investment dips.

Compound returns

As kids get the hang of investing basics, you can introduce more complex concepts, such as compound interest. At its simplest, compound interest is interest you earn on both the principal and previously earned interest, which can help accelerate the growth of your money over time. The same is true of compound returns, in which you can reinvest dividends you’ve made on your investments.

Kids (and some adults) may benefit from seeing tangible examples. For a basic demonstration, you can lay out M&M candies, with one color representing principal and another color showing interest, to show how gains can stack over time. You can also explore investing amounts with a compound interest calculator to get a sense of how money can grow.

Choosing investments

Depending on the options in your child’s investment account, you may be able to hand-pick specific investments or choose an overall risk level, ranging from the most conservative to the most aggressive.

If you have the money and inclination, you might consider allowing your child to name a specific investment to put money in and track its progress. (Of course, you might not want to put too much money in a single stock, as a diversified portfolio can help reduce overall risk.) If you want to help demonstrate the idea without putting real money on the line, you can simulate investing through stock market games.

If you set your child’s overall portfolio based on a risk level, you can talk to them about the decision-making process behind when and how you’ll adjust the investments on their behalf.

Habits to Practice With Older Kids

As your kids grow older, they can begin handling more of their money independently. You can help instill values and teach smart financial habits to help them stay organized and follow a financial strategy. Here are some great habits you might want to teach teens:

• Build a budget: Make a regular practice (e.g., monthly) of sitting down with your child to go over their budget. List expenses, track savings progress and set goals (e.g., saving for a car).

• Talk about taxes: Parents are responsible for filling out a tax return for dependent children, but kids can sign their own tax return once they’re able. Especially if your child is working a job or earning gains through investments, they should be involved in learning how taxes work with their investing account.

• Join a finance club: You may be able to find youth investing clubs and programs through your child’s school or organizations like Young Investors Society. Your library may also have resources or programs to teach financial literacy for teens.

• Plan for the future: Once your child reaches legal age to take over a custodial account (think: UGMA or UTMA), they can manage their money however they choose. It’s a big responsibility, and you can help them get off to a smooth start. As your child nears the age to take over the account, this might be a good time to discuss any financial contribution you’d like your teen to make toward their own college expenses, hear your teen’s goals and write a plan to use money wisely.

Learning to manage money well takes years of thoughtful attention. By starting while your kids are young, you can build their skills and habits a little at a time. The time investment you put into their financial education can be just as meaningful and rewarding as the money you contribute to their account.

Content within is not intended as an offer or solicitation to purchase or sell any specific security. Not to be construed as investment advice. Investments in securities involve the risk of loss.

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