Dec 11, 2020 3 min read

Teaching children about investing is an excellent way to educate them about finance and the importance of starting to save early.

A child can learn many valuable lessons from this investment and gain useful knowledge of how markets operate. This could better prepare them for financial challenges that lie ahead.

Most people learn their first financial lessons from their parents. They observe budgeting and spending habits. Do you pay cash or charge everything? Is there a lot of financial stress in the family?

An interesting way to teach a child, if you have a teen and own a business, might be hiring the child for part-time work. That teen must do something of value for the business, like clean up around the office, stuff envelopes or have their photos featured on your website.

You can pay your child a fair wage for doing so, and he or she can pay taxes on these earnings then contribute to a Roth IRA – up to $6,000 a year, under current tax law. Becuase this is earned money, it should not be subject to the Kiddie Tax that was restored earlier this year.

The Roth could be invested in a company that an individual believes may grow in value. The growth in the Roth would be tax-free as long as that person has it for at least five years and reaches age 59½. While that might seem like a long time, think how much it can grow over those years. Albert Einstein called compound interest the “eighth wonder of the world” because of the exponential growth that funds can obtain over time.

If the individual can continue to contribute every year, the balance could grow to a large sum by retirement. If plans change and access is needed to the funds, the contributions can always be pulled out tax-free because they were paid when the money was contributed. Only the earnings would be taxed. These funds also may not be considered in the FAFSA college financial aid formula.

Taxes are very likely to rise in the future because of the large government deficit. This would make the elimination of future taxes very desirable. The Roth would continue to grow tax free. Too many people end up with too much of their savings in qualified accounts, which can create a future tax time bomb. Tax diversification is a lesson many of us could benefit from.

Teaching finance basics, such as how to balance a checkbook, also are important to learn. Have you ever purchased something at a store? The cashier rings up the sale and tells you the price is $5.23. You hand over a $10 bill, which the cashier punches into the register. As he or she is ready to give you change, you ask ‘Can I give you a quarter.’ The cashier is totally confused.

Use the opportunities this holiday season to teach the people you care about on developing better financial habits. It will enrich their lives.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.