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.
|