The Common Sense Investor

The most important investment principle you can teach your child is to invest for the long haul.

Most of the time, we entice our kids to save so they can reach a short-term goal, setting aside their allowance to get a much-coveted toy (like an iPod or video games) or filling up a piggy bank and then spending it all in a candy store. There’s nothing wrong with that. Anything that encourages children to save will benefit them in the long run, since it gets them into the habit of setting goals and managing their resources accordingly.

Once the habit of saving is in place, however, parents can make the next step and teach kids how to make long-term investments. Now how exactly do we define long-term investments in this case? Well, maybe not as far as a retirement fund, but a good start is their college fund.

A college fund is still something they can relate to, and imagine themselves actually enjoying. Note that you can’t give them a goal that isn’t attached to something concrete. Children can’t imagine themselves earning money for money’s sake, as they don’t wake up in the morning wanting to be rich. “Profit” is too abstract for them; they think in terms of experiences and moments. “Financial stability” will also fly over their heads, as they wouldn’t know what financial instability is (don’t mommy and daddy pay for everything?). So even if you give them a long-term investment goal, it’s still got to be for something they understand here and now.

So what investment instruments are available to a child? Well, you can get them blue-chip stocks, but chances are you’ll be managing it for the child (unless you have a Wall Street Wonder in the family). Problem with that is the child has nothing concrete to hold on to, and no learning experience to speak of; it won’t be much different from you giving the bulk amount in the future.

The best long-term investment tool where a child actually gets involved is time deposits. Why? Because of the rollover periods. While it’s a long-term investment, they periodically have an opportunity to add to the time deposit. How much they add, and consequently how much they earn, is within their power. A passbook records all their deposits and the interest they’ve earned. Again, it’s concrete. He holds the value of his investment in his hands, and if he wanted to, he could withdraw it without risk of depreciation. (Not that you’d let him, but the option to do that makes all the difference in the child’s mind.)

True, a time deposit is not the most profitable long-term investment you can make. But remember, the goal here is not to earn the most money, but to get your child into the habit of managing his money. Anything too complicated that requires a background in finance and monitoring will simply overwhelm the child. He will think, “I can’t do this, only my parents can.” This defeats the purpose of getting him involved. It may also be counterproductive by making him think he has no “investment savvy.” So keep it simple.