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Kids: making finances fun
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April 28, 1999: 11:02 a.m. ET
Teaching your children to invest early on can help prepare them for a secure future
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NEW YORK (CNNfn) - You stress to your children the importance of good grades. You ask them to carry their load of household responsibilities. And you try your best to instill in them a sense of monetary value - all in the name of real world preparation.
So why stop there? If you really want to do your kids a favor, experts say you should start investing for your child at day one and get them involved in the process as soon as possible.
"For a lot of parents, it just seems like there are other concerns," said David Brady, senior portfolio manager for Stein Roe's Young Investor Fund, a growth stock mutual fund designed for kids. "They focus on education and staying out of trouble and by doing that they somehow believe that [financial security] will take care of itself."
Unfortunately, one has little to do with the other.
"The problem is, [parents] don't understand how little time it takes to accumulate quite a bit of money," Brady said.
Here's an example: If you save $50 a month for your child for 18 years, and he or she contributes nothing to the fund thereafter, the value of the savings will climb to $1 million by the time your child retires at age 65. That's assuming an average 8 percent return on your investment, adjusted for inflation.
Imagine what that investment could become if the child begins contributing, too.
Getting started
Parents often think of mutual funds and equities as the domain of adults, even when they're investing on their child's behalf. In many ways, they are.
(The concepts can be too complicated for young children to grasp and most states won't allow kids under 18 to make direct investments; they have to have their parents do it for them.)
But that doesn't mean children can't use their growing years to learn the ropes and acquaint themselves with the basic terms and concepts of finance. Kids can learn a lot, experts say, by simply watching the performance of their stock portfolio, or savings account.
Step 1
Experts say you can start the education process at about age 5, depending on the maturity of the child, by teaching them the value of the dime, nickel and penny. Once you feel they're ready, start them off with a small monthly allowance and teach them to save the bulk of it each month.
You might also consider taking your child to the bank to open their first savings account - which can be an exciting field trip for youngsters. When they begin earning money from odd jobs - babysitting and paper routes -- encourage them to put that money into their account.
At this stage of the game, it's best to keep it simple -- and keep them involved by showing them their bank statement each month. Showing them how much they've accumulated, and even earned in interest, is usually enough to keep even small children interested.
Once you feel they are ready, (generally around age 10), begin educating your kids on stock market investments.
This may seem a daunting task, but there are plenty of educational books and Web sites out there to help. (See related sites above)
Here again, you'll want to begin by teaching your kids the basics -- the common terms used in the stock market, the general concept of making money by risking money.
You might even consider rewarding your child for jobs well done with shares of stock in a company. Ask a financial advisor or your broker for advice on which stocks to choose, or call up a few big name companies yourself and ask for their shareholder prospectus.
But be sure to choose a company that your child can relate to: McDonald's (MCD), Disney (DIS) and America Online (AOL) are commonly recommended.
Teach them how to track their stock performance in the newspaper, or online. Once the stock begins to move, they'll want to know why.
"I think the key is really investing in a company that's going to be around for a while, like McDonald's or Disney," said Jeff Baryshnik, a 20-year old investor and founder of easyinvesting.com. "Those are places [your kids] can visit so you can go there and show them they are not just selling food but making a profit. That's sort of an entree to explaining the markets."
Becoming a partial owner in the company, is also "something cool they can tell their friends," he said.
Baryshnik said he started investing at age 11 and has won three national investing competitions. Over the years, he said, he's become a big fan of direct investing, which allows you to purchase shares directly from the company to avoid huge broker fees.
He suggested this might be a good way for kids (with the guidance of their parents) to start out.
Hundreds of companies offer investors a direct stock purchase option and many allow you to put small dollar contributions - as little as $10 at a time - into a trust account until you accumulate enough to purchase shares. Some allow you to buy fractions of a share.
(Click here for MoneyPaper's link to No-fee corporate stock programs)
Fun with funds
Slowly, parents are starting to recognizing the need to help their children set and reach their financial goals. And Wall Street is beginning to take notice.
In the last 10 years, a handful of mutual funds have sprung up targeting children and their parents.
Among the largest, is Stein Roe's Young Investor Fund.
Founded five years ago, the growth stock fund now has $1.1 billion in assets under management and more than 200,000 shareholders. As of March 31, the fund's 12-month growth rate was 13.31 percent; year-to-date its 8.71 percent and its six month average is 31.35 percent.
The fund, with a four-star overall Morningstar rating, has consistently outperformed the S&P 500 and, since its inception, has beaten 92 percent of all other mutual funds with similar investment objectives.
The fund's portfolio consists of investments in Intel (INTC), Cisco Systems (CSCO), McDonald's and America Online. Brady said the fund is first and foremost a high-growth investment vehicle, but it also takes special pains to make the fund kid-friendly.
"We try to invest in companies that kids can easily understand and our educational material is targeted to about the 6th grade level," Brady said. "It's all in the presentation I think."
The fund sends out easy-to-understand newsletters to kids each month, explaining what's happening with the markets and how to track a company's financial health.
Other funds
USAA Mutual Funds Inc. offers a similar fund geared for kids; the USAA First Start Growth Fund (UFSGX).
Company spokesman Tom Honeycutt said the fund is part of a broader money management program designed for kids that allows them to open up a savings account and invest in mutual funds. Like Stein Roe's, the fund sends out monthly newsletters for kids helping to explain the goings on in the market.
The long-term capital appreciation mutual fund is three-years-old and manages assets of $131.6 million and its one-year return is 31.89 percent. Year-to-date the fund has earned 9.42 percent. Those figures far exceeded its benchmark, the S&P 500 index, which earned 18.49 percent for the year, and 4.98 percent year-to-date.
The fund invests in a range of technology, health care and consumable stocks, including Hershey Foods Corp. (HSY), PepsiCo (PEP), The Gap (GPS), Tootsie Roll Industries (TR), and Mattel (MAT). The fund is reachable at 800-531-0553.
"The program is really a tool for parents to teach their kids the importance of saving and investing so it has a dose of educational aspects to it as well," Honeycutt said.
He said the fund manager gets lots of feedback from young investors. "One kid called in about Beanie Babies and asked if we couldn't invest in them," Honeycutt said. "We got to explain in the newsletter that Beanie Babies are owned by a private company and we explained the difference between public and private companies."
For the parents
American Century Investments also offers the American Century Giftrust Fund, an aggressive small- to mid-cap fund that allows investors to set up educational fund trusts on their child's behalf.
There's a 10-year minimum investment in the fund.
In essence, the American Century Giftrust Fund is a trust that you, the parent, set up as a gift for your child (or spouse). But that doesn't mean your child has to be left out of the loop. You could still show them their mutual fund statements, using it as a springboard to "Finance 101."
Founded in 1983, the fund's one-year rate of return (as of April 26) is negative 18.88 percent; its 5-year annual compounded rate of return is 8.29 percent, and its 10-year average return is 15.58 percent.
Similarly, there's the Royce GiftShares Fund (RGFAX), a special purpose fund that seeks capital appreciation by investing primarily in small- and micro-cap companies.
Since its inception, in December 1995, the fund has grown 16.6 percent. It's down 12.9 percent so far this year, though.
"I think [kid-friendly mutual funds] are very important for children old enough to understand investing and what it's going to mean for their future," said Michelle A. Smith; managing director of the Mutual Fund Educational Alliance. "Tell them, 'This is your college money and you can't touch it, but here's how it works.'"
The facts
The bottom line is: get your kids interested in saving and investing early on, a practice that will serve them well in the years to come.
Studies show that too few are getting that education at home, and even fewer are getting it at school.
The American Savings Education Council in Washington this week released a report revealing that 21 percent of students between ages 16 and 22 have taken a personal finance course through school, and two-thirds admit that they should know more about money management.
Thirty-one percent of students report that their parents rarely or never discuss setting financial goals with them.
"Smart parents would start by introducing their children in a benign fashion to the value of money and what it provides by way of necessities, the difficulty in earning it and the discipline it takes to save it," Smith said. "It's a message that has to be heard by parents loud and clear, over and over again." 
--by staff writer Shelly K. Schwartz
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