How to Give Your Child a Financial Head Start

It used to be easy to save for your child's future. Today, building wealth for your kids is harder.

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Today before the sun rose, young law enforcement officers with young families prepared to go to work all across the nation. These young officers spent their shifts serving their communities and answering calls that potentially placed them in harm's way.

Many things went through these young officers' minds before they arrived at their calls. They were thinking about not only what would happen at these calls but what would happen to their spouses and children if they should be injured or killed.

Law enforcement officers choose this career because they want to serve their communities. But for most young officers, this career offers little in return in the way of financial reward. So young officers pretty much have to work overtime or take on several secondary jobs to take care of their families' needs.

And times today are more stressful on the law enforcement family financially. A young mother or father serving as a sworn officer must ask questions like: How am I going to pay for my college loans (if applicable)? How am I to save for emergency expenses or retirement? How can I help my children get a financial start in life? How can I pay for college or vocational training for my children?

These are questions that all young mothers and fathers ask themselves regardless of profession, but for officers the answers to these questions are more urgent because of the danger of their jobs and the fact that their earnings are set by governmental action.
It used to be easy to save for your child's future. Decades ago parents were able to open a passbook savings, CD, or money market account for their young son or daughter and the money would accrue 6% interest.

Today, building wealth for your kids is harder. Parents can still open that passbook money account for their young son or daughter but it will only return a minuscule amount at .02%. Or if they are lucky enough to be enrolled in a credit union account they may receive .30% on their return.

So if you want to find a solid return on your money and plan for the futures of your children, you need to get a little more adventurous and take more risks with at least some of your money than an FDIC-insured savings account. Which probably means stocks, unless you have great talent with real estate or some other wealth-generating engine.

Understanding the Market

There are a variety of ways to invest in the stock market. But the two most common are to buy shares of a mutual fund or to buy shares of common stock.

Mutual funds are probably the most popular form of investing in the contemporary United States because they are the primary mechanism for investing used in 401(k), IRA, and other types of retirement savings. A mutual fund is a collection of stocks or bonds or both (hybrid) selected and managed by a fund manager. The fund is then sold in shares to investors. As the value of the collection of assets rises, the value of the fund and each owner's shares rise. Mutual funds in retirement accounts are one reason why more American than ever now have exposure in the stock market.

The other way people invest in stocks is to buy shares in individual companies. A share is literally partial ownership in the company, including a claim on the company's earnings and assets. People make money on stocks through appreciation in the value of the stock (unless they short the stock) and through dividends—quarterly disbursements of a portion of earnings—if the company pays dividends.

It's very important to remember that dividends paid on stocks are taxable income. Also, if you sell a stock for a profit, your gains are taxable as capital gains federally and often as ordinary income at the state level. One great thing about buy-and-hold investing is that gains in the stock market are only taxable when you take the profit.

Buying Stocks

Stocks are bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

If your goal for your investment is to help your child later in life, you can start a custodial brokerage account for a minor child. This can be accomplished with a very small investment. Usually $100 or less will get you started.

A custodial brokerage account is an account that an adult establishes for a minor with a brokerage firm to deposit the child's funds. Those funds are then used to purchase securities. Once the child reaches the age of maturity (18 or 21 years old in most states), the account automatically converts to his or her control.

This is one way young children can begin to acquire financial stability at a young age. If there is one thing that most young children like, it is money. By sitting down with young investors and showing them the rewards of a simple investment, they will soon learn the power of investing.

But remember, investing in the stock market is not a short-term process. You need to teach your child that he or she should not obsess over the daily value of a portfolio. Stocks go up, stocks go down. Unless you need the money right away or something truly terrible has happened to the company you invested in, don't sell just because of a price adjustment.

The Basics

Many parents feel or state they know nothing about the stock market and they are scared by it. Years ago getting into the stock market was expensive and confusing. The internet today has many articles on the stock market and how it works. Additionally, there are many brokerage firm offices and online brokerage firms that want to assist investors of all ages.

Some examples of companies that are interested in helping investors are Charles Schwab, TD Ameritrade, T. Rowe Price, Scottrade, and E-Trade. All will help you get started investing in the stock market. And their fees are nominal compared to what old-fashioned brokers used to charge.

As mentioned, you should not invest for the short term but invest for the long term. Time and patience is the greatest benefit each investor has with investing in the stock market. Your children will have plenty of time to recoup any short-term market loses.

And smart investors look at times when the market is down as buying opportunities. So don't panic over market corrections, temporarily lowering a stock price 10% or more to adjust to overvaluation.

Historically, a bet on the market is a safe one. The stock market's S+P 500 Index over the last 10 years has grown 57% and over the last 20 years has grown 221%. The longer your money is in the market the more it makes.

Investment Returns

To understand the power of investing in stocks, consider a small investment you could have made five years ago. Let's say your child received $600 from a special life event in January 2011. You placed $300 in the stock market through your child's custodial brokerage account and $300 in the bank.

After five years in the bank, compounded daily at .30% your child's account would have grown to $304.53, increasing your child's wealth by 1.5%. Now, let's say you took the other $300 and bought AT&T stock (Market Symbol: T). At the end of those same five years your child's account would have grown to be $533.55, increasing your child's wealth by 77%.

Hedging Your Bets

As a standard rule of thumb in finance, an investor should always want to ensure that his or her portfolio is diversified. So don't place all of your child's money received from various birthday parties, allowances, small side jobs, and special life events in the stock market and certainly not in one stock. Spread it around. Just give consideration to having stocks in part of that spread. By investing in the stock market with companies that have been around for a long time and pay dividends, you will significantly increase your child's chance for financial security.

Companies like Coca-Cola (KO), AT&T (T), United Parcel Service (UPS), CSX Railroad (CSX), Disney (DIS), The Kellogg Company (K), Johnson and Johnson (JNJ), Walmart (WMT), Mattel Toys (MAT), and General Electric (GE) are a good place to start. They have strong histories and pay solid dividends.

As your children become older, around middle school age, begin to talk to them about the importance of saving and investing for the future. Let them get into the act. Help them look for companies to invest in based on their interests and known commercial products. You can also make it more fun by opening a small brokerage account of your own and competing against your children to see who creates the best return in a given month.

If children learn about finance when they are young they will have a different financial outlook, not only in their wallets and bank accounts but in their knowledge and attitude toward it. This gives them the opportunity to have that easier life you were looking for them to enjoy.

The author is a law enforcement officer who owns shares of AT&T, Coca-Cola, Walmart, and CSX Railroad. Companies mentioned in this article are examples of publicly traded companies only. The author takes no stance and makes no recommendation regarding in which companies to invest. Each investor should familiarize him- or herself with each company's prospectus, including investment objectives, risks, charges, and expenses before investing in that company.

George J. Stiemly Jr. is a detective sergeant with the Baltimore Police Department. His father was a detective within the same agency. Stiemly has served as both an investigator and supervisor and has worked in the Uniform Patrol Division, the Narcotics Unit, the Robbery Investigation and Shooting Unit, the Education and Training Unit, and is currently assigned to the Internal Affairs Section. He has been married for 20 years and has three children.

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