One of the best gifts any parent can give their children is a working knowledge of money and investing. From the time they are old enough to get an allowance through their teenage years, there are several things kids need to learn to survive their journey to financial independence. The earlier you start teaching and talking to your kids about money, the easier it will be for them to become financially savvy.
Usually, when children are old enough to start earning an allowance, they are ready to start learning about what they can do with their earnings. Younger children can begin to understand saving by working toward a goal, like buying trading cards or a video game. They can put their allowance into a piggy bank, wallet or purse until they have saved enough to buy the item they want.
Savings accounts can also help children learn about the concepts of debits and credits as they deposit and withdraw their money. When they receive a bank statement, they will be able to see exactly how their money accumulates and how interest can help their earnings grow every month. Don't let fears of a minimum balance dissuade you from opening an account for your child, some banks let minors start a savings account with as little as $1.
While savings accounts help children learn about the benefits of earning interest, credit cards can quickly teach them about paying interest. This lesson is especially important if you have a teenager with their first credit card. If a teenager keeps a balance on a credit card, interest costs can add up quickly before they, or even you, notice. A $400 jacket bought in August can wind up costing about $423.64 by the time exams roll around in December, assuming the credit card has an 18 percent annual rate and you pay the 2.5 percent minimum balance every month. This might not seem like a lot of money, but it also assumes no other charges were made during that time.
As your children get older, you may want to consider giving them a few shares of stock or a bond to encourage them to learn more about investing in the capital markets. After giving your child a gift of stocks or bonds, you can help them monitor the progress of that investment. Bonds can be redeemed at different times depending on the series or issuer. Gifts of stock, especially stock from companies that your children are interested in, can also help a child learn about the market and the risks associated with equities. With your help, they can learn the importance of diversification, dividends and much more.