Here at The Motley Fool, we've talked a lot about how to invest money for kids before college -- how much you need to put in your education savings fund, where to put it (in a 529 plan for example), and how to supplement those 529 plan savings. Today I want to talk about something just a little bit different: how to teach your children to save for the future and, in particular, how to invest.
My plan comes down to three parts: a bank account, a virtual stock investing game, and an easy-to-use "real" investing account.
A three-step scheme for teaching kids how to invest -- and why
Growing up in the '70s, the formula for teaching kids to save and invest was simple. You got an allowance. You saved it up until your piggy bank had an appreciable heft -- and then you headed down to the local Bank & Trust to open a passbook savings account.
Interest rates were steep back then. It wasn't great for a homebuyer with a mortgage, but for a kid with a savings account (who was unaware of the meaning of "inflation"), things were pretty all right. Interest rates never dipped below 2%, and in some years they ran as high as 10% or more. You saw the interest pile up on your deposit pretty quick.
But what about today? According to Bankrate.com, the average savings account in the U.S. is paying just 0.25%. Money market accounts, once touted as a way to improve on bank interest, average 0.14%. A kid opening a small bank account today might wait months before seeing their first penny of interest accrue.
Lesson 1: Banks are for saving, not investing
With interest rates so low, parents today have a hard time convincing kids that it's possible to grow their savings by opening a bank account -- but that's not necessarily a bad thing.
Banks are a great place to store short-term savings, because they keep your money safe and easily accessible. However, they're not the best places to grow your wealth. That's why my first step in mapping out an investment plan for kids might be to help them open a bank account. Set it up, put some money in, and then watch as...nothing happens. Paint dries faster than a bank account earns interest today.
And that's why your next step is to introduce your kids to the alternative.
Lesson 2: "Gamify" investing
Compared to the 0.25% interest on bank account deposits, the 9% long-term average growth rate of the U.S. stock market resembles a rocket ride to the moon. Of course, few kids can afford to buy stocks with their allowance -- even if they have a lawn-mowing or baby-sitting gig on the side.
So how do you teach your kids the advantages of investing over mere saving? One way might be to make a game of investing by setting up a virtual portfolio with "play money." Motley Fool CAPS is one great place to do this. With CAPS, children (and adults) can virtually "buy" (and also "short") individual stocks that they believe will do well (or poorly). Then they can watch how these investments perform in real time -- rising one day, falling the next. They can also monitor the long-term performance of their stock portfolio and see for themselves how well it outperforms the 0.25% interest rate on a bank savings account.
CAPS offers a way to introduce children to the concept of investing. It may be the safest way to do so, as there's no real money involved. In fact, it's even free to play.
Lesson 3: Real money for the smartphone generation
After a few months (or years) of experimenting with picking stocks on CAPS, it might be time to allow your budding investing expert to try their hand at real money investing. Granted, they may not have enough savings to open an account at Schwab or Fidelity. But the internet offers a handful of free stock investing services that permit small investments.
Robinhood requires no minimum investment to open an account, and it charges no fee to maintain an account once it's opened. It also permits you to trade stocks for free, whether you're buying and selling. You do technically need to be 18 years or older to open an account, but a parent could open an account in the parent's name on a child's phone -- then allow the child to control the investments in that account.
Nor need you worry that your child will spend money he or she doesn't have: Trading "on margin" requires signing up for the fee-based Robinhood "Gold" service. Don't sign up for that service, and not only will you pay no fee, but you'll know that your child won't be able to put you into debt with an accidental purchase of 100,000 shares of Pets.com.
If you want to give your kids an education in how to turn a savings fund into investments that will pay for more education in the future, I humbly suggest that this is the safest way to do it.