Teaching Kids About Money

My parents were basically fantastic. I'm going to indulge in a little bragging right now, so forgive me. They have a good strong marriage, they taught all of us about the Gospel, school, work, happiness, marriage, and getting along with others. Basically they covered most of the major topics that a person needs to know to have a happy and fulfilled life. I've heard them say that one of their major goals was to create self-sufficient and well-rounded children who could do well in the world. While that's probably a goal for most parents, mine worked and planned to teach us the things that we'd need. More than just a nice platitude, that goal informed the way they approached parenting. Basically, when my wife and I are unsure about what to do with our kids, we'll try to figure out what my parents would do.

As great as they were, finances are one area that my parents could have covered better in their various life lessons. I don't think they fully understand money themselves though. They hit many of the most important things like "spend less than you earn," and "save up for things you want instead of buying them on credit," but they didn't really do much to explain other concepts like investing, savings rates, asset allocation, etc. I didn't really start to understand how investments worked until I researched it on my own.

My wife and I have been pondering how to teach my kids more about money than I learned. They're pretty young, so we have some time to figure things out. but we have done one thing: we established a custodial account for each of them.

A custodial account is a special kind of brokerage account. Basically you can buy stocks just like you would with a regular account, but the stocks are owned by the child whose name is one the account. You (the parent) act as the custodian and have full control until the child reaches a certain age. In most states the age is twenty-one, while a few are as low as eighteen.

I am a firm believer that kids learn best by doing. In this case, I want to have a real account statement that I can show them. I'm hopeful that it will be a useful tool for the kids to learn about money and math. For instance, when you're learning addition and subtraction, how much more interesting would it be to be able to use real numbers and see how much money you made or lost in a year? What about when they're learning about compounding interest? Suddenly they can see a real example of compounding interest before their eyes. I can imagine them using data points to create plots when they learn about graphs. Basically I want this to be something that they can be involved in and see grow.

A custodial account lets them own real securities in companies that they like. While I typically consider index funds to be the best investments for most people, for a kid to own a few shares of Disney, General Mills, Mattel, Nintendo, or Coca-cola could be something really exciting and could tie all this financial stuff to the real world.

I have high hopes for these accounts as learning tools, but there are a few drawbacks to be aware of if you're suddenly considering starting these up for your kids. First, it's possible that your kid might be an idiot when they're eighteen or twenty-one. I know I was. For me, it would frustrate me if they wasted this money, but at some point you have to let them make their own mistakes. I would consider that I had done my best to teach them, so if they mess it up there's nothing I can do about that.

Second, they aren't great vehicles for transferring a lot of wealth. I'm looking at probably less than $15,000 when all is said and done. If you've got a much larger amount of money to transfer to a child, you'll be better off with a trust fund.

Third, if one child's investments do better than the other's there could be some jealousy. This could be a problem or an opportunity. I'm hopeful that my kids will learn to be happy for each other, not to compare themselves negatively with each other, though that might be a bit of wishful thinking. We'll cross that bridge when we get there.

Finally, the money is actually the child's as soon as it goes in the account. There are serious issues with parents having some buyer's remorse and wanting their money back. You can't do that. In the eyes of the law, it's robbing from the child. Technically you could probably get around most legal issues if you raided the account, but it's wrong to do so. We believe in "obeying, honoring, and sustaining the law," right? Don't put money in there that you're going to need back in the future.

As for me, I'm excited with the possibilities that come with the custodial accounts. I think there are tremendous opportunities for teaching my kids and I'm excited to see what happens with these accounts.

If you're interested in opening a custodial account, there are lots of options. I chose sharebuilder.com since we already do our banking with capitalone.com, but do what works for you.