Teaching Kids to Invest: Making Saving Fun and Rewarding
Getting kids to save for the future might seem like an uphill battle, especially when they’re bombarded with tempting spending opportunities. But by making saving fun and rewarding, you can instill strong financial habits that will benefit them for a lifetime.
One powerful tool is a Roth IRA. While it might seem early to think about retirement, opening a Roth IRA for your child can be a game-changer. It allows their earnings to grow tax-free, giving them a head start on building wealth.
Turning Saving into a Game
The key is to make saving an engaging experience, not a chore. Here are some strategies to consider:
- Compound Interest Magic: Explain the concept of compound interest in a way that resonates with your child. Show them how even small amounts saved regularly can grow exponentially over time.
- Matching Savings: For every dollar your child saves, match it with an equal amount. This incentivizes them to save more and see their money grow faster.
- Rewarding Milestones: Set savings goals and celebrate when they’re achieved. Rewards can be non-monetary, like extra screen time, a later bedtime, or a special outing.
Empowering Through Responsibility
As your child gets older, offer them more responsibility and autonomy over their finances:
- Budgeting Basics: Involve them in creating a small household budget, allowing them to allocate funds for their own spending and savings goals.
- Investment Exploration: Let them participate in choosing investments for their Roth IRA. This hands-on experience can spark their interest in investing and financial literacy.
- Family Investment Club: Create a fun family activity where everyone picks stocks or other investments. Track performance and award a small prize to the best-performing investor.
Leading by Example
Children learn by observing. Be open about your own savings goals and financial decisions. Let them see you prioritizing saving and investing, and they’ll be more likely to follow suit.
Work together on a family savings goal, such as a vacation or a down payment on a house. Seeing their contributions make a tangible difference can be incredibly motivating.
Earned Income and Roth IRAs
To contribute to a Roth IRA for a child, they need earned income. This means money earned from work or services rendered, such as a part-time job, babysitting, or lawn mowing. The maximum annual contribution for 2024 is $7,000 or the total of the child’s earned income for the year, whichever is less.
It’s important to note that money received from parents as an allowance or for chores does not count as earned income. Neither do cash gifts, investment earnings, or scholarships and grants.