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San Clemente Journal

Help Your Offspring Become Smart Investors

May 05, 2006 10:42AM ● Published by Don Kindred

by Ken Stelts - Investment Representative

To become a good saver and investor, you probably had to learn some hard lessons along the way. Wouldn’t you like to save your children or grandchildren those troubles? You can - by teaching them, early on, about the basics and benefits of investing. 

Here are a few ideas for getting young investors off to a good start:
• Suggest a savings strategy. If you give young children an allowance, suggest that they divide it into two pools - “saving” and “spending.” And if they earn money baby-sitting or mowing lawns, offer to match whatever they put into savings. They will be pleased to see how their balance grows, and, hopefully, they will be motivated to keep putting more in.

• Make “stock-picking” fun. A lot of adults believe their children or grandchildren would not be interested in something as “grown-up” as the stock market. But that’s just not true: Kids are often fascinated by the idea of owning shares of a company. And the more they understand about owning stocks, the more interested they become. So, consider playing a family “stock-picking” game. Have everyone in your family choose a stock to follow for a month or so. At the end of that time, award a small prize to the person whose stock has done the best. You also may want to add some “qualitative analysis” by examining the different factors that may have caused the winning stock to outperform the rest. Keep all explanations fairly simple, but don’t underestimate your children’s ability to grasp fairly sophisticated concepts. Children love to learn - and they’re often better at it than adults.

• Give stocks. You can go beyond the stock-picking game and actually give shares of stock to your kids. Try to find companies that make products or provide services with which your children are familiar - provided, of course, that the stocks are of high quality and have good prospects. When you do give stocks to your kids, be aware of the “kiddie tax.” According to the kiddie tax rules for 2006, the first $850 in unearned income - interest, dividends and capital gains - is tax-free, and the next $850 is taxed at the child’s tax rate, which is typically 10%, or 5% for long-term capital gains. If your child has unearned income of more than $1,700, he or she will be taxed at the rate that would apply to you if this money were added to your taxable income. Children 14 and over pay taxes on all unearned income at their own rate. If the child has earned income from a part-time job, consider setting up and possibly even funding a Roth IRA for them. A Roth can be a very tax efficient way to invest and can give them a terrific head start on retirement savings. The IRS doesn’t care who funds the Roth, as long as the contribution doesn’t exceed the child’s earned income or $4000 whichever is less.

• Show the right behavior. Children are great imitators - so if you show them how you are saving and investing for the future, it’s likely to leave a strong impression. Let them know when you’ve reached a particular savings/investment goal - enough money for a new car, for example. Show them the statements for the accounts in which you are investing for their college education. Make sure they understand the concepts of setting objectives, making regular contributions, delaying gratification, etc. Explain the awesome power of compounding interest and how even small amounts invested today while they are young could yield large benefits in the future.
By following the above steps, you’ll be providing your children or grandchildren with the knowledge and skills necessary to help them become savers and investors. And those lessons can last a lifetime. b by Ken Stelts - Investment Representative

To become a good saver and investor, you probably had to learn some hard lessons along the way. Wouldn’t you like to save your children or grandchildren those troubles? You can - by teaching them, early on, about the basics and benefits of investing. 

Here are a few ideas for getting young investors off to a good start:
• Suggest a savings strategy. If you give young children an allowance, suggest that they divide it into two pools - “saving” and “spending.” And if they earn money baby-sitting or mowing lawns, offer to match whatever they put into savings. They will be pleased to see how their balance grows, and, hopefully, they will be motivated to keep putting more in.

• Make “stock-picking” fun. A lot of adults believe their children or grandchildren would not be interested in something as “grown-up” as the stock market. But that’s just not true: Kids are often fascinated by the idea of owning shares of a company. And the more they understand about owning stocks, the more interested they become. So, consider playing a family “stock-picking” game. Have everyone in your family choose a stock to follow for a month or so. At the end of that time, award a small prize to the person whose stock has done the best. You also may want to add some “qualitative analysis” by examining the different factors that may have caused the winning stock to outperform the rest. Keep all explanations fairly simple, but don’t underestimate your children’s ability to grasp fairly sophisticated concepts. Children love to learn - and they’re often better at it than adults.

• Give stocks. You can go beyond the stock-picking game and actually give shares of stock to your kids. Try to find companies that make products or provide services with which your children are familiar - provided, of course, that the stocks are of high quality and have good prospects. When you do give stocks to your kids, be aware of the “kiddie tax.” According to the kiddie tax rules for 2006, the first $850 in unearned income - interest, dividends and capital gains - is tax-free, and the next $850 is taxed at the child’s tax rate, which is typically 10%, or 5% for long-term capital gains. If your child has unearned income of more than $1,700, he or she will be taxed at the rate that would apply to you if this money were added to your taxable income. Children 14 and over pay taxes on all unearned income at their own rate. If the child has earned income from a part-time job, consider setting up and possibly even funding a Roth IRA for them. A Roth can be a very tax efficient way to invest and can give them a terrific head start on retirement savings. The IRS doesn’t care who funds the Roth, as long as the contribution doesn’t exceed the child’s earned income or $4000 whichever is less.

• Show the right behavior. Children are great imitators - so if you show them how you are saving and investing for the future, it’s likely to leave a strong impression. Let them know when you’ve reached a particular savings/investment goal - enough money for a new car, for example. Show them the statements for the accounts in which you are investing for their college education. Make sure they understand the concepts of setting objectives, making regular contributions, delaying gratification, etc. Explain the awesome power of compounding interest and how even small amounts invested today while they are young could yield large benefits in the future.
By following the above steps, you’ll be providing your children or grandchildren with the knowledge and skills necessary to help them become savers and investors. And those lessons can last a lifetime. b 

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