Investing for kids: A guide to building financial independence

Teaching your children about money is like giving them a superpower. While many parents start with a piggy bank or a savings account, it’s important to take this education to the next level as your kids get older.

Introducing them to the world of investing when they’re in their tweens and teens—both key principles and how to invest—is an important step toward their eventual financial independence.

Why teach your kids about investing

Understanding how and why to invest is a key part of financial literacy, extending beyond just earning and saving money. It introduces concepts like goal setting, patience, and discipline, all while offering your child the potential to grow their money.

Whether they’re saving for college, buying their first car, or have dreams of starting a business, the earlier you have the conversation, the more time they have to invest and work toward their financial goals.

3 investing principles to teach your kids

1. Compound growth is your best friend.

Compound interest makes money grow exponentially over time by reinvesting earnings. A quick and fun way to demonstrate the power of compounding — especially to younger children — is to ask if they’d rather have a $100 bill today or a penny that doubles every day for 30 days. They might be surprised to hear that in 30 days, that penny would be worth about $5.4 million. ¹

Unfortunately, there’s no such thing as a penny that doubles each day, but this example can help them begin to understand that through investing, they can use their money to grow more money.

2. Start early, add often.

Investing wisely takes discipline and patience. The graph below illustrates this lesson in two scenarios.

• Invest once: The blue line shows a lump sum of $15,000 invested at a compounding annual return of 7%. After 40 years, they’ll have over $200,00.
• Invest regularly: The red line shows the same $15,000 invested in year one, plus $10,000 invested each year thereafter. Using the same rate of return and time horizon, they would end up with over $2,000,000.

3. Think long-term.

Investing is about working toward long-term goals, not funding short-term needs and desires. For example:

• If your child wants to buy a new video game when it comes out in a few months, they should focus on accumulating money in their savings account.
• If they aspire to buy a car in 5 years, it would probably be smarter to invest in stocks, bonds or mutual funds that pay dividends and income and will grow over time.

That said, it’s important to talk about risk and its relationship to reward. Money in a savings account has little to no risk, but it also delivers small returns. Investing in stocks or mutual funds might provide higher returns, but it comes with higher risks as markets can fluctuate. By helping them understand these trade-offs, you’ll prepare them to make smarter financial decisions.

3 steps to help your kids start investing

Once your child understands the basic investing principles, show them how it works in real life

1. Open an investment account for kids.

Choose an account that aligns with their goals and your family’s situation. Here are some options to consider:

• Custodial accounts. Your child legally owns the funds in a custodial account, such as a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account, but you control the investments until they reach the age of majority (generally 18 or 21, depending on your state). It’s important to note that money spent out of this account needs to be for your child’s benefit, and you should consider reviewing the “kiddie tax rules” before opening this type of account. 
• Guardian accounts. A guardian account gives you full control. You can make withdrawals for any reason, and you’re the one who is solely liable for the taxes on the earnings at your marginal tax rate. Ask your financial professional for more details about how these accounts might affect your individual tax situation.
• Custodial Roth IRAs. Also called a Roth IRA for kids, this account is good for a child 17 or younger with earned income (either W-2 wages or income from babysitting, dog walking, etc.). Like a Roth IRA for adults, a custodial Roth IRA allows contributions to grow tax-free.

2. Decide how much to invest.

After you’ve opened your child’s account, the next question is how to fund it. Many parents start with a small gift to their child’s account.

Then, help your child fund their account with a portion of their allowance, earnings, or gifts. Teach them to divide their income into four categories: spending, saving, sharing and investing. For example, if they earn $100 a month, they might spend $30, save $20, share $20 and invest $30. This exercise can help them see how budgeting, saving, and investing all work together. 

3. Choose an investment strategy.

Once your child knows how much they’ll have to invest, it’s time to decide how to invest.

One approach is to allow them individual shares in companies they know and like. Kids can relate to owning shares in companies they recognize, like their favorite sneaker or game brands. Explain how these companies sell their products, they’re creating profits for their shareholders—and now your child is one of them.

Alternatively, teach them how to build a diversified portfolio. While this may not be as exciting as owning individual shares, it can certainly be less volatile. For example, exchange-traded funds (ETFs) allow them to invest in a wide range of companies with just one purchase. A popular starting point could be an ETF that tracks the S&P 500, giving them exposure to 500 of the largest companies in the U.S. 

By combining fun, familiar examples with sound financial education, you can help your child feel confident and empowered about managing their money.

Support your child’s financial independence by teaching smart investing habits. Learn how we can help you start investing today.