Investing is an activity in which starting early has exponentially more impact, yet this is not taught to kids nor emphasized in our school system.
If your family is in a stable position financially, it is a great idea to start a brokerage account in the name of your child and fund it with some starter cash, especially if your child is interested in getting into investing.
I run an investment club at Eastlake High School, and was shocked to find out that 5 out of 7 club members in an internal survey did not have a brokerage account. Four of them said it was because their parents would not allow it.
This is concerning because not only is the cost of living in the Seattle area going up, but the purchasing power of the U.S. dollar is going down. For example, Sammamish housing prices have almost tripled in the past 20 years, according to data from the Federal Housing Finance Agency. In the same period, average four-year public college tuition has more than doubled even after accounting for inflation, according to data from the College Board. And U.S. inflation just hit 5% in May, marking its highest level since 2008.
This makes investing at a young age and making your money work for you all the more important to both protect the value of cash and to compound savings so that the younger generation can afford a higher cost of living in the long run.
Parents are likely hesitant to get their kids started early with investing due to misconceptions over stock market risks, as well as not being ready to grant their kids a high level of autonomy over personal finance.
For any investment, a degree of risk exists. But many long-term investments are not actually that risky.
Take a S&P 500 index fund for example, which bundles together the top 500 companies in the U.S. into a single package that you can purchase a stake in. The S&P 500 has never gone down in a 15-year time period, and $10,000 invested in 1971 would be worth more than $1.7 million today. Markets experience crashes and volatile swings in the short term, but if history repeats itself, the chance of losing money over a long period of time is very low.
If parents are worried about giving their kids too much autonomy, specialized account types put control in the guardian’s hand while allowing minors to invest.
Parents can take advantage of a custodial brokerage account, also known as an UTMA or UGMA, which are named after the Uniform Transfers to Minors Act of 1999 and the Uniform Gifts to Minors Act of 1999, respectively. With these accounts, parents or guardians have full control of the account and the investments made within them. Parents have a fiduciary duty to invest in the best interest of the minor, and the minor gains full control of the account upon reaching the age of majority, which is 21 in the state of Washington.
Therefore, irresponsible investing should not be a concern, but it is still a good idea to allow kids to dabble with investing and get an understanding for themselves. Let your child make the investment decisions, but supervise the process and execute the final trade.
There is also no better time to start investing than now. Innovations like fractional share trading allow for purchases with as little as $5. Automated investments that transfer money from a bank account in regular intervals have made investing more accessible than ever before. And in a time where inflation is running high, investing savings into assets will help build wealth, while depositing savings into a low-interest bank account will lead to a decline in value.
The next step is to teach kids some of the basic concepts of investing, help them figure out what they want to invest in, and empower them to make a few trades on their own.
Doing so will set your kids up for financial independence in the future.
Vineel Bhat is a Sammamish-based investor and student at Eastlake High School. He created an online investing course for beginners.