By ELIZABETH AYOOLA by NerdWallet
During my teenage years, my mother handed me two worn, blue, passport-sized books with details of my custodial investment accounts. He had no idea what to do with them, but it didn’t matter, because the accounts were empty anyway. Maybe for the better, because I’m pretty sure my assets wouldn’t have stood a chance.
I am now a mother, I opened a custodial account for my 4-year-old son, and I often think about how I can prepare him to take control of his investments in the future. If you’re looking for ways to prepare your child to invest, an experienced parent and financial experts have some ideas.
SHARE EARLY MONEY VALUES
Preparation starts as early as possible when it comes to teaching your kids about money, says Cristina Livadary, a certified financial planner and co-founder of Mana Financial Life Design in Marina Del Rey, California. No matter how old her son is, she can begin by talking openly about finances and sharing her values around money.
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One thing I’ve started doing with my son is teaching him the value of giving, encouraging him to give toys away before buying new ones. One approach Livadary recommends for teaching the values of money is to assign what she calls a “job description” to every dollar she gives to her children.
“One of my favorite things is to take the dollars and really break them down in a way that’s really aligned with values,” says Livadary. “So let’s say you get $3 a week: $1 for giving, another dollar for saving, and another dollar for spending.”
TEACH THE BASICS OF INVESTING
A custodial brokerage account is an investment account opened by a parent or guardian for a minor until the age of majority.
If your child has a job with taxable income, I might also be able to help you open a Custodial IRA or a Roth IRA.
The nice thing about custodial accounts is that even though the kids don’t control the accounts until they come of age, you can show them what’s going on.
Michael Costello, a retired Miami-based consumer products executive and father of three, says he prepared his now-adult children to manage their custodial accounts by teaching them about budgeting and saving early. He also allowed them to look at their investment accounts and see how they were growing, and facilitated investment discussions with them.
“We ended up having a lot of conversations about why do you do long-term holdings? What should you look at? What are ETFs vs. regular stocks? What do bonds do?” he says.
Teaching his children about exchange-traded funds and other assets made him confident that they would have access to custodial accounts when they turned 18.
There are many ways to teach your children about the power of investing. Helping them understand what compounding interest can do for every dollar they invest could motivate them to invest for the long term. If you think they’re ready to start trading, some brokers offer youth accounts that allow teens to start investing with parental supervision.
SET GOALS AND TEACH DELAYED GRATIFICATION
Delayed gratification is an important adaptive skill parents can teach children to manage custodial accounts, says Anna N’Jie-Konte, CFP and founder of Dare to Dream Planning in New York City.
Since custodial accounts are brokerage accounts that can be accessed at any time, it’s important for kids to view their investments as long-term money that can buy them flexibility and options down the road, she says. This could help them refrain from spending it now.
“I think one of the superpowers of people who are really successful financially and just successful, is when they have the ability to say, ‘I admit I want this right now, but it’s going to be so much better if I wait and keep it up.'” He says.
But for delayed gratification to work, it’s important to have financial goals and a plan, which I didn’t have as a teenager, which is why I think the investments in my custodial account wouldn’t have lasted long. For the record, my financial plan was to become a rich actress and finance all of my life’s expenses that way.
When setting financial goals with your children, it’s okay to set both long-term and short-term goals. Why? Some people just aren’t inspired by financial goals that are too far in the future, says Livadary.
“Sometimes it’s buying a house in the next three years, but sometimes it’s taking a vacation…and that’s fine. That’s their version of a life they’re excited to live,” she says.
TRUST THE PROCESS
It’s okay for your kids to make money mistakes, too; they can be teachable moments, says Costello.
“You can’t hold back and coddle them, you have to give them control, they have to make some mistakes and then over time they figure out how to manage money better.”
If despite preparing them, you feel that your children are not ready to manage your assets, another option is to transfer some of your assets to a trust where you can maintain control beyond the age of majority.
This column was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Elizabeth Ayoola is a writer at NerdWallet. Email: firstname.lastname@example.org.