The Building of Wealth
by Richard Lyons
A Financial Journey from Cradle to College
Part II - Investing
As parents, we all want the very best for our childís future. This includes their health, their education, and of course their financial well being. It will be even more important for them than it was for our generation to be financially disciplined. The following are a few tips on how you can teach your child to become more prepared for their future financial life.
Once savings have accumulated to an investable level (more than the minimum amount that can be invested in a financial product) it is time to look for an investment that is very secure and will offer more income than a bank savings account. These could include things like a Government (Savings) Bond or a Term (Certificate of) Deposit.
At this point in your childís investment life, I would not recommend investing in things like mutual funds or stocks. Itís true that these investments could likely make more income over the long term, but it is also true that they may not . A loss of investment at this stage could cause your child to become discouraged and lose the discipline for savings. Savings and Investment should be a positive experience that continually grows over time. It should be fun, not stressful.
Once your childís savings discipline is firmly entrenched and she has a few of the secure investments churning out income, it is time to start explaining the more complex forms of investments such as Mutual Funds and Stocks.
You must explain to your child that Stocks and Mutual Funds go up and down in value every day. They are not a smooth ride like she has been used to. (They are the Roller Coasters of the investment world.) But over a long period of time, they should produce more of a return than the secure investments. But these results are not guaranteed to happen.
Once you explain these investments, ask your child what they think of the idea of the ups and downs of these types of investments. The answers should give you an idea as to whether your child is ready for this type of risk. Not every child, or adult for that matter, is comfortable with the uncertainty of the equity markets.
If your child is comfortable with the concept of the ups and downs, then I would suggest starting them with a good performing balanced mutual fund. This will be a fund that invests in stocks, bonds and cash investments. These are basically the least risky of the mutual funds and should produce a constant income in the form of dividends and provide the lease amount of ups and downs in the market.
Depending on your financial expertise, you may want to introduce your child to your financial advisor at this point, if you have one. If you are a self managed investor yourself, you will probably be in a good position to run the proper screens to find the best suited balanced fund.
I am a strong believer that no one is an expert in all financial areas and most people should seek the advise of a qualified advisor in the areas they wish to invest in and are not too familiar with themselves. This is especially true once the investment amounts become larger.
As your child matures and the investment portfolio grows, there will be a time when the portfolio should be further diversified. These could include investments such as individual stocks, bonds, equity mutual funds, REITís ( Real Estate Investment Trusts ) and or individual revenue properties. The choice of investments at this stage will require a lot of analysis and should be made in conjunction with the proper financial help, such as a financial planner.
The ultimate investment decisions will be made between you and your child. It is important that you remain working together up until your child becomes financially self sufficient. This means until after college graduation and/or getting settled into the career of choice. After this point you will likely find that your child will still come to you for advice from time to time.
Investing should start and remain as a fun experience that can be shared between you and your child throughout their development. Watching their investment dollars grow will be a satisfying and rewarding experience for the both of you.
About the Author
Richard Lyons is the founder of the blog Wealth Building Tips and Trends and is the author of Five Star Wealth Builder, a comprehensive self help guide for individuals who wish to improve their financial lives.
Richard holds the Chartered Financial Planner designation and has worked in the financial industry for many years helping individuals with their financial needs and concerns.
Part I - Saving is featured on our Parents/Savings/Articles page.