How to Teach Kids About Money, Saving & Investing: Lesson 7

What Stocks To Invest In For Kids

We discussed a lot in this series but there are a few more important points to cover. What stocks to invest in for kids is a keystone to this entire conversation. As you know, I am an insatiable optimizer, so, what complicated derivatives and cover option did we go with? Well, hold the phone, this is not my investment portfolio this is my kids’ investment portfolio the investment products must be suitable for the investor, so let’s look at how this all played out there is a lesson to be had. But, before we get there, one must inspire before one empowers.

We Have Already Talked About:

• Lesson 1
  • When to Start: What Age to Start Teaching Money Management Concepts
• Lesson 2
  • Exactly How I Taught my Kids Money Concepts
  • How to Start Age-Appropriate Lessons: Teachable Moments Are Worth the Wait
  • The Value of Hard Work & The Value of Money
• Lesson 3
  • Teaching Kids About Debt
• Lesson 4
  • Set up Rewards to Encourage Saving: Short Cuts Leave You Getting Short-Changed
  • Culpability in Energy & Resource Waste Around the House
  • Frugality and Accountability
  • Correcting Behaviors
• Lesson 5
  • Rewards & Consequences: Incentives Work Like Magic
  • The Average American is a Millionaire: They Just Spend Themselves Broke
  • Establishing a High Savings Rate
  • A Lifestyle of Financial Freedom
  • Passive Income: Income Independent of the Corporate Career
  • The Investment Bank of Dad: If You Can Make Them Bathe You Can Make Them Save
  • Inspiring Kids to Invest
• Lesson 6
  • Set Up Rewards to Encourage Savings
  • You Don’t Keep Everything You Earn.
  • Teaching Kids Money Management: The Keys to the Kingdom
  • Becoming a Financial Representative of Your Family: Managing a Portion of the Family Budget
  • The Envelope System
  • Value-Based Spending
    
    
    

We Still Have a Few Points to Cover in This Article:

• What Stocks to Invest in for Kids
• Paying Dividends
• Compounding Success
  
  
  

What Not To Invest In

Now, I could put my kids in a boring ol’ index fund for low fees and the simplest possible management over time. But that is zero fun for a kid. These may be popular investment products in the FIRE community but that simply won’t cut it for an eight-year-old. While JL Collins makes many great points in his book The Simple Path to Wealth for that being the lowest effort and lowest cost path to market returns, I knew that approach was never going to get the kids’ wheels spinning.  It was not going to elevate my kids’ excitement level to the critical mass necessary for my kids’ to not only stick with investing but also have something to brag to their friends about. No worries, I have a solution for that.

What Did My Kids Invest In

After opening their investment accounts and transferring in money, I had to wait a few days for the account’s funds to settle. I was driving the kids home one day while the funds were settling and I decided to make that day into an investment field trip so that is exactly what I told the kids. I told them it was time for a spontaneous field trip to their favorite stores to learn about investing in companies.

We passed all the storefronts as we drove through town. I asked the kids if they could own any company they wanted, which companies would they own? They shouted out McDonald’s, KFC, and several others. So, we pulled into McDonald’s I told them they could eat there if they could tell me enough reasons McDonald’s was a smart business to own. While we don’t eat there often, it is OK to spoil them a little around the things that you want them to take an interest in.

The Incentive Determines the Outcome

My kids sat there for a moment. I could see their minds envisioning the ice-cream dripping over their finger as they tried to lick it up as quickly as it melts in the heat of the sunny south. In the interest of turning that vision into a reality, my kids blurted out anything that came to mind that would pull them closer to that happy meal and an ice-cream cone. Ideas start flowing…

“Their sign is always the same! So is their store, so you know it’s McDonald’s.”

“Good,” I said, as they kept speaking over each other.

“They have a parking lot for your car.”

“The food is ready fast but not fast enough when you want it”

“There is ice-cream, and everyone likes ice-cream so everyone will want to come.”

“Happy meals have toys!”

“Ketchup is free.”

On and on they went. We reasoned through why some attributes were important to the business. I interjected a few observations as well to get them thinking in the right direction.

“Is the food expensive or can almost anyone afford it?”

“Is it served hot? Does that affect the taste?”

“How many employees do they need?”

After their bellies were happy, I asked them what their next favorite store was, and off to Walmart we went. As they looked over all the products, toys, and games they wanted they rattled off more ideas. My daughter said, “I want to buy Barbie, iPad, frozen, and the whole store too.” My son said, “I want to buy Xbox, iPad, Star Wars, and all the video games.”

A Parent Company

This gave me the opportunity to explain what a parent company was. And at their age, I just related it to their parent, me. I told them that while the child company can have different product ideas, interests, and even profits. The parent company still tells them things like when bedtime is (operating hours), how many friends (employees) they can invite over, and how to spend their allowance (operating income.) You just have to boil concepts down to age-appropriate answers for your kids. It helps to add in characters that they know like dad and maybe batman who is a win around the Refined household.

When You Have Buy-In You Get Payout

When we got home, I pulled out Ye’ ol’ Laptop and sat down with the kids. My daughter started investing in McDonald’s, YUM (KFC), Mattel (Barbie), Apple (iPad), Disney, and Walmart. My son started investing in McDonald’s, Microsoft (Xbox), Apple, Disney, and Activation Blizzard (video games). I will mention that behind the scenes I was doing fundamental analysis to weed out some of the under-performing brands and build excitement around the profitable ones with solid management that had optimistic future earning potential. In that way, I defiantly influenced their choices but at the end of the day, they are their choices.

Now before the index fund disciples fire up their email replies… (I can already hear spirited fingers angrily thrusting into their keyboards to detail the advantages of low fee index funds) …recall the primary objective here. We are talking about kids. Capturing their interest is a thousand times more valuable than optimizing risk or returns at this point. If they lose 10% on a single hundred-dollar share, they only lost $10. But if what they are invested in inspires a lifelong interest in stock investing that is most likely millions of dollars of game-changing difference considering their young age. We defiantly want to win the long game. When you have buy-in you get payout.

Now every time my kids buy a happy meal or video game they smile and say, “Dad I just paid myself!” and that smile my friends, is priceless.

Paying Dividends and Monopoly

On the outdated, green carpet of the living room, the Refined family often plays the board game now known as Monopoly. It is a great game to teach my kids how to count money, practice purchase decision tradeoffs, and most importantly the difference in cash flow between being a renter and being a landlord.

The game was originally designed by a college professor to teach his students the difference between Renters and Landlords, which it was appropriately titled back then.

The game is also loaded with educational life lessons called “Community Chest” and “Chance” cards. One hot afternoon playing under the slowly swirling fan in the living room. My son drew a card and asked, “What is a dividend?”

A dividend is the distribution of some of a company’s earnings to a class of its shareholders, as determined by the company’s board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date. Dividends may be paid out as cash or in the form of additional stock.

What is a Dividend

While I would describe a dividend as a distribution of some of a company’s earnings to a class of its shareholders, as determined by the company’s board of directors. That definition is all too complicated for an 8-year-old.

To put it in eight-year-old language, I explained that it was a cash payment for a preset amount typically every year (but sometimes more often) that a company gives you as a thank you for investing money in their company.

Knowing that he owned stock in a few companies he asked, “Can I have a dividend for my investments?”

Always looking for teachable moments, I replied “Yes!” as I opened up my wallet, pulled out a crisp $50 bill, and slowly placed it in his hand. His eyes lit up with joy as he realized that I was not kidding. He held the bill with two hands to inspect the intricate designs. $50 is a lot of money for any eight-year-old in my stretch of the sunny south.

Now that I had his attention, I told him that there would be more of these payments in the future. Incredulous, he asked when. I told him how about every time you save $500 I’ll give you a dividend payment of $50 he smiled in agreement.

Game, Set, Match

My motivation was three-fold. I want to teach him the concept of how a dividend works but my stronger motivation was to inspire him to continue to invest. See by this point in this investment career he was losing steam. He didn’t have any incentive for continuing to invest. He saw a lot of his money getting squirreled away in an account, but it didn’t do him any good that he could experience yet. It was starting to feel more like a chore than a game. I am all about gamifying life, so I needed some incentive to pull him forward to greater achievements. Additionally, I reinforced the concept that in life you get what you ask for not what you deserve.

Based on his saving rate, allowance, and age I picked $50 for every $500 saved. That felt right for his determination level. (result may vary for your kids unless you’re his mother… then they would be the same for your kid, I digress) Vary the intensity and frequency as you see fit for your kid. I chose to exaggeration a real-world value. 10% is well above the average dividend in the stock market. Some lessons need exaggeration in the beginning to anchor the concept. Also, keep in mind that this is a more advanced concept, I wouldn’t introduce it right away.

Now my son has a clear and achievable goal that pulls him along through the investment journey with just enough incentive to keep him striving for a greater balance. He loves to check on the account and see how close he is to the next dividend payout. Game, Set, Match!

How Is He Doing Now?

My son saved up $900 in his Investment Bank of Dad before he broke the bank. Or in other words, before I had to dole out enough interest payment for it to be worth my time to turn over the responsibility of paying interest to the actual stock market. Note the Investment Bank of Dad I spoke about in the previous weeks’ article is the best way I have heard of to help a child learn the concepts of investing and build an opening balance for an investment account. Just have a look at how quickly my son built a five-figure investment balance.

He is on track to beat Mr. Buffet, and I think he honestly will. As long as he gets to $4k by 14 and compounding does it’s magic, he could end up a billionaire so long as he does not do anything stupid. Warren’s co-manager of Berkshire Hathaway, Charlie Munger says:

…You can have a remarkable long-term advantage by trying to be consistently not stupid, instead of trying to be very intelligent.

This Worked a Little Too Well

In fact, this worked a little too well. My son saw how fast his money was growing and wanted to open another brokerage account for his spending money. I am glad I captured his interest but did I just create a monster? Now I have to find one of those fractional share apps like Acorns, M1, or Robinhood. I will have to manage the transactions in and out of another account now too. Did I just work myself into more work? Perhaps he is ready to take the reins on that account himself?

You might ask why is my son the subject of my kids and money series? Why don’t I talk about my daughter more? Nope, I am not a raging sexiest that believes money is a man’s only sport. Remember, no two kids are alike. Each child is at a different developmental stage regardless of age. My son makes a good case study because he is advanced. My daughter is a good case study for having to hit the brakes a little though she is on the same plan. Kira’s still working on combing her hair without tears. And I am optimistic that we are within a few years of a major breakthrough there too, fingers crossed.

Remember if your kid doesn’t take to this like a duck to water, don’t give up. Take a step back, simplify for the next go, or even wait for a little maturity and growth to happen. You might just need a better-rested kid in a different mood. Just don’t push it on you kids, let it be their discovery and their adventure. This is not a parental competition of who has the youngest kid with the highest net worth. The goal here is for our kids to be successful with money over their lifetime, we have some runway here. We all want our children to be more successful than we are. Exercise the patients necessary to win the long game.

Final Point

My focus in everything I teach my kids is not to make money an obsession or an idle but rather to establish an open dialog about money matter in my home. To develop a healthy, open, and transparent attitude towards the subject. I aim to make it an exciting game, not a stressful vice. With the hope that my kids have positive feelings toward money that pull them forward to ever-higher levels of success. I don’t want them to ever lose sleep over how they are going to cover bills. This world seems to have enough worries of its own. Let’s not let money be one of them.

Money should be a tool for success not a source of stress.

P.S. Props to the Mom on Facebook that taught me brushes are better for girls’ hair than combs. That was a million-dollar tip! …How is a single dad who has never used a bush supposed to know this 🤷? It was not in the adoption manual… not that I read manuals, after all, I am a man 😉

Keep the FIRE burning my friends.