Earning and Investing Money

There are two ways for kids to make money, actively and passively.  Active income is money earned through working.  When kids mow the lawn, they are actively earning their income.  Passive income is money earned through investments.  If your child's mutual fund earned 6% interest in a year, the fund grew without your child having to do anything to make that happen.  We want our kids to earn money through both paths.

  Earning Money

Kids are going to spend a lot of their adult life working to earn money.  So it's a good idea to give them hands-on experiences while they are still hanging out with you.  With you they can learn about effort, time management, fair pay, and work ethic.   And the bonus is that when kids have had to work hard to earn their money, it has more value to them and they tend to make better choices about what they do with it.

Depending on their age, the types of jobs kids can do come in many forms.  Young kids can weed the garden while older kids mow the lawn.  You decide reasonable fees to pay your kids and offer them a list of jobs that they can choose from.

If your child is working to earn money to reach a goal, there is absolutely nothing like seeing the sense of satisfaction and pride on his face when his goal is achieved.  We can't deny our kids the opportunity to experience this kind of success.

  Investing Money

Now that kids have money, they need to know that they have choices.  And not just spending choices, but investing choices, as well.  Most parents open savings accounts for their kids which is a great place to start.  But kids have something very valuable on their side and we need to take advantage of that.  It's called TIME.  If we want kids to get the most from their money, they're going to need to begin investing.

The beauty of investing has to do with something called compound interest.  Compound interest is money that grows on itself.  If you invest $100 at 10% monthly interest (no, we don't know of any place other than the bank of mom and dad that does this!), by the end of the month you'll have $110 ($100 + $10 interest).  By the end of the next month you'll have $121 ($110 + $11 interest).  That's because you earn interest on the interest already earned.    

  Investing 101

Investing comes on a continuum from least risky to most risky.  Ever heard anyone say, "Diversify, diversify, diversify"?  There's a reason.  Putting all your money in stocks may make you very rich or very poor.  How much of a gambler are you?  A prudent investor diversifies.  That's the key to investing and what we should be teaching our kids. 

The chart below can give you an idea of some of your investment options.  The good news is that kids don't need a whole lot of money to begin.  And to get kids excited about investing, show them what can happen to their money over time through the power of compound interest.  KidsSave, a kids' savings and money management software program, can help with this.

Savings Account:  A place to keep money at a bank or credit union where it will receive interest or dividends.

Money Market Fund:  A mutual fund that buys short-term, low risk securities.

CD (Certificate of Deposit):  An investment offered by banks with a fixed interest rate and fixed maturity date.

Bonds:  A loan to a company (corporate bonds), local government (municipal bonds), or U.S. government (treasuries).  Bonds come with a fixed interest rate and maturity date.

Mutual Funds:  A collection of stocks and bonds.

Stock:  A certificate representing one unit of ownership in a company.

Securities:  Stocks and bonds.

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