Teaching Kids Money – How Investing Can Provide Passive Income

One of my favorite podcasts is The Stacking Benjamins Podcast. The other day, I listened to an episode, and they had a listener question. The listener wanted to know how they could invest in their grandchild’s future while teaching them about money. Joe and the Other Guy talked about setting up a $10k account when the child is one year old. The podcast link is below.

https://www.stackingbenjamins.com/ron-lieber-993/

It got me thinking if somebody had $10k that they wanted to invest in their children or grandchildren’s future, how could they turn this into a teaching moment. Similar to what we do for our Niece and Nephew’s birthdays.

The Plan

Create an investing account when the child is one-year-old, invest $10k into a low-cost index fund. There is no need to tell the child about the investment you made for the first ten years. They will have no idea how much $10k really is. All they know is it will buy a lot of legos. Think creatively and change this plan to help teach what is important to you.

When the child turns ten, you then tell them about the investment. Each year from 10 – 18, you withdraw $800 from the investment account. The $800 is 8% of the initial investment. Each year for the child’s birthday, you give them the $800 for their birthday.

$800 is a huge birthday gift. This is where you can influence the child on what is important to you. Do you make them save for a car or college? Give a certain amount to a charity? Have they put some into a Roth IRA if they have a job? You decide, help mold them into who you want them to be. It will be a great opportunity to have money discussions at least once a year. Set up a plan for the next year, help guide their future.

Why not just keep the money invested?

You could leave the money in an account and give it to them years later. The importance of giving an impressionable child money out of the account is that you are teaching them that investments can provide income. Once they realize this, they are more likely to focus on saving when they have an income of their own. Stress that their investment is paying them 8% each year; that is why they are receiving the money each year.

Have an exit plan when you start this and know your end goal. Do you want to give them the money when they graduate High School or College? Do you want this to be the down payment on their first house or investment property? It could also fund a Roth IRA for their first 6 years of their career. Give them one or several options, based on what is important to you.

https://interestingdollar.com/book-recommendations/