Teaching kids how to save is a valuable first step toward learning how to manage money. But it shouldn’t stop there. While savings accounts are a safe bet and an easy concept to grasp, the real earning power comes from investing their hard-earned cash.
That’s because kids possess a very powerful gift: time. The earlier your child starts investing his or her money, the greater the rewards are later. That’s due to the magic of compounding, wherein the gains continue to grow, because each year money is made from the previous year’s profits.
For instance, if $100 is invested in the S&P 500 and it gains 10% in a year, that holding will be worth $110 by year’s end. After another year and another 10% gain, it’s worth $121. After a third year it’s $133.
According to CNBC’s “Mad Money” host Jim Cramer, with that 10% average annual return, an investor can double his money in about seven years.
“The magic of compounding works best the younger you are, because that means you have more time for your money to grow,” he told CNBC viewers on his show.
But can kids really grasp the concepts of investing?
Tim Sheehan, co-founder and CEO of Greenlight, the teen-focused digital banking company that provides parent-managed debit cards for kids, says they absolutely can. “Kids will surprise you with how much they will understand and how much they can do,” he said. “If you start with very simple things like relating it to products or services they use, you can explain the high-level concept of investing to most kids.”
Greenlight’s approach to teaching kids money-management skills is working: To date more than 700,000 families are using its app-based service, which provides customers three accounts in one: a spending account, savings account and giving account so kids can donate to a charity. Now the company is about to launch its investment account feature, encouraging kids as early as 10 years of age to research and invest in stocks with parental supervision.