Offer Children Valuable Finance Lessons

Physician's Money Digest, October15 2003, Volume 10, Issue 19

One of the best gifts any parentcan give their children is a workingknowledge of money andinvesting. From the time they are oldenough to get an allowance throughtheir teenage years, there are severalthings kids need to learn to survive theirjourney to financial independence. Theearlier you start teaching and talking toyour kids about money, the easier it willbe for them to become financially savvy.

Earning Interest

Usually, when children are old enoughto start earning an allowance, they areready to start learning about what theycan do with their earnings. Younger childrencan begin to understand saving byworking toward a goal, such as buyingtrading cards or video games. They canput their allowance into a piggy bank,wallet, or purse until they have savedenough to buy the item they want.

Savings accounts can also help childrenlearn about the concept of debitsand credits as they deposit and withdrawtheir money. When they receive a bankstatement, they will be able to see exactlyhow their money accumulates andhow interest can help their earningsgrow every month. Don't let fears of aminimum balance dissuade you fromopening an account for your child; somebanks let minors start a savings accountwith as little as $1.

Paying Finance Fees

While savings accounts help childrenlearn about the benefits of earninginterest, credit cards can quickly teachthem about paying interest. This lessonis especially important if you have ateenager with their first credit card. If ateenager keeps a balance on a creditcard, interest costs can add up quicklybefore they, or even you, notice. A $400jacket bought in August can wind upcosting about $423.64 by the timeexams roll around in December, assumingthe credit card has an 18% annualrate and you pay the 2.5% minimumbalance every month. This might notseem like a lot of money, but it alsoassumes no other charges were madeduring that time.

As your children get older, you maywant to consider giving them a fewshares of stock or a bond to encouragethem to learn more about investing inthe capital markets. After giving yourchild a gift of stocks or bonds, you canhelp them monitor the progress of thatinvestment. Bonds can be redeemed atdifferent times depending on the seriesor issuer. Gifts of stock, especially stockfrom companies that your children areinterested in, can help a child learnabout the market and the risks associatedwith equities. With your help, theycan learn the importance of diversification,dividends, and much more.

There are several places to find materialsto help educate your children aboutmoney and investing. Web sites by theAmerican Savings Education Council(www.asec.org) and the Securities andExchange Commission (www.sec.gov/investor/students/tips.htm) are great places tostart. Talk to your financial consultantabout any materials they have aboutteaching kids to invest.The earlier you start teaching yourchildren about money, the more quicklythey will be able to develop their financialskills and confidence.

Joseph F. Lagowski is vice president,investments, and a financialconsultant with AG Edwards inHillsborough, NJ. He welcomesquestions or comments at 800-288-0901 or www.agedwards.com/fc/joseph.lagowski. This article was providedby AG Edwards & Sons, Inc, member SIPC.