Although it is never too late to start saving and investing, the values of sound financial management can be taught early on. Teaching children to set goals and save money for things they want to buy is a wonderful learning opportunity. It's also a good time to teach them about the different types of investments that are available.
Step 1: Earning money
A first step is showing a child how to earn money. Children can't learn to manage money if they don't have any! It can be small to start with; for example, a dollar for each grade of school that the child is in, paid once a week. Encourage them to divide the money between spending, savings, and charitable giving. A new piggy bank can make getting started more fun; there are some you can buy that have separate compartments for different uses of the money.
Step 2: Goal setting
Then, help the child come up with a goal for savings. If a trip to the toy store hasn't given you any ideas, just ask what the child wants that costs more than the weekly allowance. Help the child figure out the best way to save. For example, all of the allowance for the number of weeks it would take? Half of the allowance for twice the number of weeks? The allowance plus birthday money? Providing a few different options shows children that they have some control over the best way to reach their goals.
Step 3: Savings account
Once a child understands how saving up money works, you can add another lesson about investing. You can show how compound interest allows money to accumulate faster than it would if left in a piggy bank. As a next step, help the child open a simple bank savings account. The child can contribute money from allowance, gifts, and jobs such as shoveling snow or babysitting.
Step 4: Investment account
As the child accumulates more money, it may be time to consider opening a mutual fund account. It will give you an opportunity to teach the child about the risks and potential return available in stocks and bonds. You can set it up as a custodial account under the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act (UGMA/UTMA). To encourage the child to contribute to the account, you may want to consider matching any of the funds the child contributes. (You can demonstrate the benefits of a 401(k) and similar employer retirement plans that way, too.)
Step 5: Stay involved
You can help children follow these investments by reviewing account statements with them, showing them how to do financial research on the Internet, and answering their questions about money. If you get them interested early on, they'll have skills they can use for a lifetime.
Finally, show responsible financial behavior yourself. If you are careful with your finances, the child will learn from you.