By Pam Krueger
There’s no minimum age your child has to reach in order to understand money and even the idea of investing. One of the most fulfilling things I’ve had the opportunity to do on and off during our seasons of filming MoneyTrack is meet some young people who not only know how to save money but also how to invest it like the pros.
On season two of MoneyTrack, we featured 14-year-old Damon Williams, who taught himself how to invest when he was just nine years old. By the time I met Damon, he had accumulated a portfolio of high-quality stocks valued at more than $50,000. Getting to know Damon made me much more aware of other kids with similar traits who could become young investors.
Just after we produced that episode with Damon, I was chatting with the son of one of my close, personal friends, and noticed he seemed pretty intense about his allowance money. Kam Markoski was only nine years old at the time, and I could see this young guy was already a serious penny pincher. Kam didn’t want to spend a dime of his own allowance on anything. Coincidentally, his grandfather had watched the MoneyTrack episode, and saw 14-year-old Damon explaining how he picked stocks like Nike and Apple because he knew their products so well, and then he stayed invested versus trying to buy and sell and beat the market. His grandfather along with Kam's parents were pretty convinced their own nine year old could follow in Damon’s footsteps, and Kam was enthusiastically onboard to get started because he said he liked the idea that his money could go to work for him while he was asleep.
Kam had $100 in birthday money to get started investing and then asked his grandfather if he could help him get started by kicking in a $100. So with his $200 in hand, Kam had to start thinking about which company he wanted to be his very first investment. After talking it over with his parents, he decided that he absolutely had to own some shares of McDonald’s. When his parents asked nine-year-old Kam why he picked McDonalds, Kam blurted out: “Because it says right on their sign… they serve a billion burgers a day!”
Over the next several years, Kam went on to build a pretty impressive stock portfolio made up of companies and brands he knows and uses himself every day, including Hasbro, Snap, Yahoo, Apple, Google, and 3D, and of course he still owns his McDonald’s shares. He then diversified his portfolio by investing in some index funds that expose him to the entire stock market. This way, as he explains it, he’s betting on the whole race and not just one horse. Now that’s common sense even some adult investors lack.
Kam’s 16 now and a junior in high school. Last evening, the two of us, along with my friend Norb Vonnegut who writes the wealth management column for The Wall Street Journal presented Kam's story to a public audience of parents and grandparents from surrounding communities. I interviewed Kam about some of the concepts he’s learned during his eight years as a young investor. I was pretty astounded at his level of knowledge. For example, he told me he now understands the basics of how the stock market and capital markets work, and that certain companies are private and you can only buy stocks in companies that are publicly traded. He has learned about mergers because Yahoo was recently acquired by Verizon. He knows what dividends are and that not all companies pay them, and he's learned about initial public offerings. Kam even knows how a class-action lawsuit works because as a shareholder, he received notifications about the Snap lawsuit which alleges that Snap misrepresented key user growth metrics at the time it went public.
Kam’s investing, not gambling. He says he’s in it for the long haul, just like Warren Buffett. Not only does Kam have about $18,000 worth of equity in these companies, he has a whole new awareness of the financial world and how the stock market works. He now wants to major in business or finance when he heads off to college in 2019.
Kam and Damon are living proof that it’s rarely too early to start teaching kids the basics of money and finance. All they need is awareness that money can be used to buy things, whether it’s a McDonald’s Happy Meal or that really great bicycle they want. But there’s no need to push it on kids who aren’t ready to learn. All you need to do is be prepared to nurture their interest as soon as it appears; you just need to know where to find the tools to help them.
If you know a young person who might want to learn how to save and invest, here’s how you can get them started. Generally, there are three solid options if they aren’t earning a paycheck. The first two do not have maximum contribution limits, while the third one does.
- Guardian account – With this type of account, you actually own the money, and you can withdraw it whenever you want for any reason. However, you’re also liable for the taxes on any earnings the account might make, and you pay taxes at your own rate. You have complete control over the account, so it’s basically an informal way for you to allow your children to invest, but under strict supervision.
- Custodial account – You don’t actually own the money in this type of account; your child owns it. However, you do still control the account until your child turns 18. One benefit of this type of account is that it’s taxed at your child’s tax rate instead of your own, which usually would be higher. There are two types of custodial investing accounts: the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act. These two accounts are similar in that they allow you to give your child funds to use, in this case, to invest in the financial markets.
- Roth IRAs – For some kids, a Roth IRA is a good choice. It lets them dip their toe into the ocean of investing and finance, but they don’t have to do a lot to these accounts. They can watch their money grow and learn about the stocks and funds their Roth invests in, but they don’t need to study every investment thoroughly. Discount brokers such as E-Trade, TD Ameritrade, Fidelity and Schwab are all good options, but it’s a good idea to compare the minimum required investments and fees associated with each account. Schwab and TD Ameritrade appear to have the lowest fees for Roth IRAs.
So if you’re ready to teach and your child is ready to learn, start looking at these options and discuss them with your child. And let me know how you do so I can do my next story on your child!