From the age of 3, when his parents gave him a toy cash register, Aidan Sullivan has loved money.
The tow-haired boy pretended to run a restaurant, and then a store. He begged his parents for real money to stuff into the drawers. When he started getting an allowance, his parents advised that he split it into three equal parts, for savings, spending, and donations.
Now 7 years old, Aidan saves the $9 he gets each week, and figures out what to do with it later. If his parents don’t have cash handy to, say, tip the pizza deliverer, he happily lends them a few bucks, at rates that would make a payday lender gleeful. For $5, he charges $1 in interest.
Aidan likes to look at Barron’s over the weekend, particularly the stock tables, which he studies with the zeal that other kids have for baseball stats. A recent visit to Barron’s, and a demonstration of the Bloomberg terminal, delighted him.
Aidan’s father, Chris, who owns a financial communications firm in Manhattan, and his mother, Hope, who works at a New York–based foundation, are bemused. After he turned 7 and began nagging them for a bank account, his father opened a custodial one for him. It came with an ATM card in Chris’ name. The receipts the ATM spat out flung Aidan into ecstasy.
“He was adamant that he wanted to have his real money in a real bank,” his father recalls. “We found it both funny and fascinating and tried to encourage it.”
Aidan now has $530 in the account. He checks the balance once a month. He recently read a book about billionaires, and another about how to turn $1 into $1 million. Soon, Aidan may want a trading account, too. When he grows up, he says, he wants “to work with math and numbers and get a job with stocks. I’m excited for the future and happy about it.”
I met Aidan through a colleague, who is a friend of his dad’s. I was interested in Aidan because my son, whom some friends call The Prince, isn’t much older. Given the steep costs of Lego sets, I’d been agonizing about how to teach him about money. The Prince also needed some training in responsibility, I felt, as he bellowed “Milk, please!” from the table.
My son receives a $10 a week allowance, in exchange for composting, clearing the table, feeding the cat, and other chores, and I insisted that he save half of it. But the savings sat, embarrassingly for me, in a shoe box.
I asked friends in the financial industry for advice on teaching children about money. “Yours are all great questions,” said one, a parent who designs digital-communications strategies for companies. “But I’ve been too exhausted to find the answers.”
Others were equally unhelpful, especially the hedge fund manager who advised me to sell my New York City apartment and buy a much larger one with a mortgage that I could barely afford, on the theory that my son would then be eligible for a great deal of college financial aid.
But when I told my son about Aidan, it got him going. “Is he a millionaire?” he asked, eyes goggling. That didn’t surprise Dina Isola, a financial advisor with Ritholtz Wealth Management, who also runs financial-education programs for children, along with a website called RealSmartica. “People underestimate children’s capacity to get excited about money,” she says.
The best way for kids to understand money is for them to earn it, she says. “Without that, it’s not meaningful. If someone gives you money, it’s different from if you busted your rear end for it. Say you spent the day shoveling snow and you got $50, and then your grandma gave you $50. If one goes through a hole in your pocket, which feels worse?”
Experts say that parents should start paying an allowance—equal to their age in dollars, if possible—only after their kids show signs they can pitch in with chores—putting toys away or dirty clothes in the hamper. That can be as early as age 3. As they get older, they can clear the table, help with the laundry, and take the garbage out.
That makes sense to Richard Marr, an advisor and Certified Financial Planner in Westfield, N.J., whose practice, Shottland Marr Group, oversees $350 million for Wells Fargo Advisors. “When the money sits in a piggy bank, you’re putting money away that you’re not going to use today, and years down the road, it will be there for you,” he observes. You can also discuss what you do when you put money aside—pay the mortgage and so forth, he adds. “For a 9-year-old, it’s a little abstract. But a 15-year-old can see how much money it will be in 20 years. Develop their mind to offset this desire to immediately spend it.”
Neale Godfrey, founder of financial literacy specialist Children’s Financial Network, and author of Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children, likes to instill lessons about budgeting early.
She advises designating 10% of an allowance for charity; 30% for quick cash, to gratify the desires of the moment; 30% for the medium term, maybe to buy a laptop or phone; and 30% for the long term, for college tuition or another big-ticket expense.
At first, she counsels, put savings into a bricks-and-mortar bank so the child can see where the money is physically going. Later, show the little saver the balance online. Otherwise, the youngster might confuse the bank’s website with a videogame that hands out free money.
Opening an account is easy at institutions that have youth savings accounts. They generally offer minimal interest rates, but require minuscule initial deposits. A mere $25 is all that’s needed, for example, to open a Wells Fargo account that imposes no monthly service fees for holders under 18. The account, which recently was paying 0.01% in annual interest, includes an optional ATM card and can be linked to a debit card. Similarly, a Capital One kids’ account, which yields 1% and has no monthly fees, can be started with a zero balance. Parent and child open it as a joint account, into which the adult can transfer money from his or her own other accounts.
Increasingly, banks are opening branches in middle and high schools. Capital One operates a handful, including one at Theodore Roosevelt High School in the Bronx. Open on several half-days a week, it’s staffed by rising seniors trained by the bank. (Some student bankers eventually become professional bankers, through programs such as one offered by Connecticut’s Windsor Federal Savings.)
The Federal Deposit Insurance Corp. and the American Bankers Association Foundation also work with banks to teach children about money and encourage saving. Currently, 76 are in the FDIC’s Youth Banking Network.
My son is desperate to have a credit card, but he can’t until he’s 18 unless I co-sign (which I won’t anytime soon) or he proves his independence. But he could have a debit card. Capital One offers one, linked to a teen checking account, with zero fees and no minimum balance.
The Prince’s friend, Justin, already has a debit card. His mother, Sarah, is a poet who’s savvy about the child-money dynamic. She and Justin use Greenlight, one of the many apps that can help children learn to handle allowances (others include Gohenry). It costs about $60 a year, but Sarah thinks it’s worth it.
She sends Justin’s allowance from one of her accounts into Greenlight, where it’s split into sections for spending, saving, and sharing.
Sarah puts money on the debit card, capped at $200. She insists that he keep it in a Velcro wallet attached to his pants. “Of course, I’m afraid he’ll lose it. But it’s capped, and if he loses it, I can cancel the card immediately. And it’s his tough luck,” she says.
The card funds Justin’s electronic games when he wants to level up. That sounded nice, since I’m always negotiating with my son about how much he owes me for funding extra Roblox purchases. Justin’s card also funds purchase while he’s out with his mom. “It’s not about me buying him random stuff anymore,” says Sarah. “Want that chocolate? Where’s your money?”
Some of the allowance goes into savings, where parents can set—and pay—the interest rate. Sarah, being of generous heart, gives her son an 11% annual rate, so that he can easily watch the money compound.
When Justin’s grandma in California wants to give him money for, say, a birthday, Sarah sends her a link and the deposit goes into Greenlight. How about sharing? Justin and his family discussed charities, and he settled on Covenant House in New York City, which helps homeless children.
True, Sarah still has to nag Justin about helping around the house—the app won’t do that for you. But it will text you on Saturday, asking how everything’s gone with chores. On Sunday, the allowance is automatically deposited. If things haven’t gone well, she can halt the automatic deposit.
By the time children are 10, they might be ready for the next step—learning about investing. Lots of kids are naturally good at trading, having traded Pokémon cards or bought or sold old toys on eBay.
Ritholz Wealth Management’s Isola likes to show kids how the price of a pair of Air Jordans has changed over time. When launched in 1984, the athletic shoes cost $65. Recently, a pair of unworn 1984 Air Jordans was offered on eBay at $1,653.15. She then tells them about the manufacturer, Nike (NKE), and the trajectory of its shares over time. (The stock’s average annual return since 1984: 20%.)
A trading account for a child can be opened in a parent’s name, and then the two can discuss and eventually execute transactions. Godfrey recommends checking out an app called DriveWealth, which allows trading in fractional shares. (Disclosure: She consults for the company.) Another app, called BusyKid, also allows you to buy fractional shares of stock through a custodial account, and charges a small transaction fee when selling. BusyKid also manages allowance and tracks chores. It charges $7.99 a year for a prepaid spend card.
“I don’t care about great returns at the beginning,” Godfrey says. The most important thing, she adds, is connecting them directly to the investment universe. For instance, she would tell a young investor charmed by the movie Frozen that its creator, Walt Disney (DIS), makes lots of other films, too, and also owns ESPN, the new Disney+ streaming service, and theme parks, including Disney World. “I want kids not to think stock investing is outside. It’s their world. They can make the world their classroom,” she says.
Prudence also must be taught. One of Richard Marr’s clients opened an account at Charles Schwab for her teenage son, who started trading up a storm. Eventually, he realized that this was self-defeating. Marr got him to read a book about Warren Buffett. Today, the young investor majors in finance in college.
Youngsters also must learn that no one wins all the time. If the market slumps, they should hang in and dollar-cost-average. “Your greatest asset when you’re young is your age; there’s oodles of time for that to grow and compound,” Isola stresses.
Some of the child’s long-term savings should go into an education fund. Tuition and fees for a private college now average $35,000 a year. For this, you can use a tax-advantaged 529 plan. My son has two 529s, one at Fidelity, in actively managed funds, and one at Vanguard, in low-cost index funds.
While the bulk of contributions to such plans come from the parent, the child should be taught that his or her small contribution is important, too. (A 529 plan also can be used to fund private elementary and secondary school. In New York City, this can run $50,000 a year. But this is much less common.)
Another kind of plan allows prepayment of tuition at today’s level, if your little scholar eventually attends a public university. If your child decides to go elsewhere, you often can get the money back.
There are a couple of other savings vehicles for college. One is the tax-advantage Roth individual retirement account, which can only be funded with earned income. If you’ve got a child actor or violin prodigy in the family, this is worth a look. Then there’s the Coverdell education savings account, or ESA, also designed to pay for educational costs, funded with after-tax dollars that then can grow tax-free.
For more latitude, there are UTMA and UGMA custodial accounts. UGMA refers to the Uniform Gift to Minors Act, and UTMA, to the Uniform Transfer to Minors Account. Once money is deposited, it’s the minor’s property. The custodian can use it for all kinds of expenses for the beneficiary, not just education. UTMAs allow an array of assets to be transferred to the minor, including real estate. UGMAs are confined to bank deposits, securities, and insurance policies.
Unfortunately, the custodian’s control of the money can cause trouble in these accounts, which dissolve when the child turns 18, or the age of majority. A 15-year-old client of Wells Fargo’s Marr inherited more than $200,000 when his only parent died. The custodian, his uncle, had personal problems and didn’t oversee the account properly. By the time the client reached 25, he had gone through all the money.
To avoid such an outcome, parents can establish a trust for their child that stipulates how and when the money can be used. The trustee could employ the money only for specific purposes. And the beneficiary might, for instance, get part of the money at age 25 and the rest at 30.
Or he or she might not get anything if they have a substance-abuse problem for which they’re not seeking help. That could prevent the child from using “the assets to potentially kill themselves,” says Mary Browning, a trust lawyer and partner with the Hackensack, N.J., law firm of Cole Schotz.
Because setting up a trust costs money, she says it’s better to establish an UGMA or UTMA plan if less than $50,000 is involved, since it’s likely that it will all be spent on tuition or other things by the time the child is 21.
What if your child gets a windfall from an inheritance or something else? “Parents are ill-equipped to serve as proper stewards,” says Ric Edelman, author and the founder of Sunnyvale, Calif., Edelman Financial Engines, who advises using a financial advisor.
In fact, because so many issues—including tax consequences—bear on custodial accounts, 529 plans, IRAs, and trusts, doing thorough research is a must before starting one, and consulting an expert is prudent.
What if you’ve succeeded in educating your children about money, investing, and saving, and finally got them through college and out of your household?
“That’s the point when we start helping adult children to develop savings and investment habits,” says Marr, with things like budgeting and long-term portfolio growth.
Then, if your children have kids of their own, the whole cycle can start again. And you can retire.
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