So you decided that instead of sticking your tongue out and seeing if you can touch your nose again you’d be better off doing something productive.

You want to teach your kids a little about investing.  Maybe you want to teach your wee lads and/or lassies about the power of saving their hard earned dollars or about the power of compounding interest.  You want to teach them how to make it work for them instead of against them.  Maybe you just want them to have a firm grasp on the world and their finances. Maybe is a strong word.

Most importantly you don’t want them to end up like that 30-year-old guy  who refuses to leave his parents house.  Well, you’ve come to…a place.  Probably not the right place, but you’re here now so…

So you’ve made the choice to teach your kids about money.  Where to begin?  Here are 5 ways you can teach your kids about investing ranging from super easy to fairly complex with some pros and cons of each.  As per usual I will be mostly shooting from the hip so if you notice an error anywhere in this article feel free to make a mental note of it.  Not a physical note, just a mental one.

1) Teach your kids about saving money by opening up a savings account for them at your local bank

Add some money to it once per month, or whenever, if they save their money.  Teach them how the more money they have the more it compounds.  One way is to check the S&P 500 or Nasdaq ticker to see how the market has gone up or down over the month and give your child that amount.

An easier way is to just give them a set amount every month.  For example you could give them 2% of the total they have saved.  If they have $100 saved at the end of the month you give them an extra couple dollars.  The next month you’ll give them 2% of $102, that way they can watch their money compound over time.

Pros: Super simple way to teach your kids.  No need to file tax returns for them or do much of anything. Just set up a savings account at your local bank.

Cons: No real rate of return.  You have to do some math.

2) Teach your kids about saving money and rate of return by setting up a savings account with Ally Bank

Another fairly simple idea to teach your kids about money is to open up an online savings account with Ally Bank. Ally Bank offers 1.75% interest on their savings accounts.  It’s not as much as you’d make by putting their money in the stock market but it’s a lot simpler, less risky and it’s a lot higher return than you’d get for a typical savings account at your local bank.

Pros: They do the math for you.  Your kids can see their money compound.  Hedges somewhat against inflation.

Cons: Ally Bank is only online.  Takes a few days to get your money out.  While better than a typical bank 1.75% still doesn’t keep up with inflation.

3) Teach your kids about money and investing by setting up an account with Robinhood

Robinhood is an app where you can buy and sell stocks for little to no fees. It’s easy to use and you have to put money into the account before a purchase can be made so you don’t have to worry about your kids accidentally buying 3000 shares of Poptarts.

Pros: Easy to set up and use.  Let’s them pick individual stocks or index funds.  Low fees.

Cons: You would need to file a tax return for their gains if it’s in their name.  You can’t buy partial shares on Robinhood so if you want that Amazon stock you’ll need all $1603.07.

4) Teach your kids about the stock market and index investing by opening a Custodial Account with Charles Schwab

With a custodial account you as the parent have control until the child turns 18 or in some states 21.  This is handy because kids are generally dumb, I mean short sited, and would surely squander their money if given half a chance.  If you go with Schwab I recommend buying fund SWPPX which is an index fund that tracks the S&P 500 or fund SWTSX which is an index fund that tracks the total stock market.  Both of these have super low fees and automatically make you pretty well diversified.

Pros: You can start a custodial account for as little as $100.  Fairly easy to set up.  Teach your kids about money while they are actually invested in the stock market.  They’ll make money when the market goes up and lose money when it goes down.  Next to Vanguard, Charles Schwab has the lowest fees and with Charles Schwab you only need $100 to get started, not $3000 as with Vanguard.

Cons: You’ll need to file a tax return.  There are fees with trading (these can be largely avoided by preaching the buy and hold strategy to your kids).  More complex than a standard savings account.

5) Teach your kids about longterm investing and taxes by setting up a Roth IRA account for your child

This one is a bit more complicated.  The way it works is you have to pay your child for services such as lawn mowing, babysitting, eating vegetables, what have you.  They have to have EARNED income to be eligible.  They can contribute up to $5,500 to an IRA in a given year.  You can either choose a Traditional IRA or a Roth IRA.   The difference is with a Traditional IRA you get a tax deduction now but must pay taxes when you take the money out.  With a Roth IRA you pay the taxes on it now but the gains are tax free.  Since a child probably isn’t earning a huge amount now it makes sense to have the taxes taken out now since they are probably in the 0% tax bracket.

Pros:  Teach your kids about saving and avoiding the tax man all in one shebang.  IRAs have several advantages over brokerage accounts mostly in regards to how the gains are taxed. With a typical brokerage account you are taxed on the capital gains, dividends, interest and any other money earned.  With a Roth IRA you pay the taxes upfront and the capital gains, interest, dividends, etc. are tax free.  Also with a Roth IRA they can take the principal out at any point.

Cons:  They can’t touch the gains until age 59 1/2 without paying taxes and incurring a penalty.  But if they are putting money into an IRA as a child then they’re probably going to be financially smart AF and retiring early.  There are ways around paying the penalty but that’s getting into the weeds.

There you go.  As promised there are 5 easy ways to teach your kids about investing and money in general.  None of them illegal, far as I know.

Related:

A Penny Per Rock- The Original Side Hustle of Rock Picking

Investing 101- How to Invest Your Money When You Don’t Know Where to Start

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