It's graduation season -- a time for young people to proudly embark on the next exciting phase of their lives. It's also a time for parents to applaud their accomplishments while wondering (and worrying) whether or not their young ones are truly prepared for the challenges and responsibilities that lie ahead.
Unfortunately, when it comes to managing money, those concerns are real and validated, as many students now leave high school without any financial literacy or experience under their belts. In fact, according to the Financial Industry Regulatory Authority's recent study, "The Financial Capability of Young Adults, A Generational View," released in March, millennials generally show very low levels of financial literacy, with only 24 percent being able to correctly answer four out of five questions on a quiz covering every day concepts of economics and finance.
The good news is there are lots of resources to help parents instill good money habits in their kids at a young age. For instance, you could consider giving them a gift of stock by opening a custodial account in a minor's name, which may help them learn about researching the markets, selecting investments, learning about risk and investing for the long term. Keep in mind that you'll be in control and monitoring all activity in the account.
It's an easy and affordable way to provide access to education and tools focused on the basics of investing -- how to make a trade, research a stock and develop a diversified investment strategy that will build over time. It's all about planning for and investing in the future.
Here are some ideas to consider for getting your children on the road to planning their financial future:
1. Get started by opening a custodial account with a low-cost, easy-to-use online broker. Online brokers (including ShareBuilder) offer custodial accounts, some of which don't have any minimums to open the account, and access to a range of tools, including investment tutorials and research to help novices begin investing.
2. Let the kids decide where to invest. Research different companies with them, and with your guidance, let them select the companies and brands they already know and love. Then, every month, quarter and year, you can track the stocks' performances together.
3. Keep it fun and make it personal. Many online investment accounts let you give your account a fun nickname.
4. Set long-term goals, and provide incentives. Maybe your child would like to save for a car or a college fund. Consider offering incentives to help them work toward their goals. For example, every time money goes into the custodial account, match the investment up to a certain amount.
One of the most important lessons you can drive home is the idea that small investments, whether in stock, a 401(k) or other vehicles, may grow exponentially over the course of several decades. Of course, it's also important to understand that investing involves risk, and values can move up and down with changing market conditions (learning that it is also possible to lose all or part of the amount invested).
5. Make the money conversation permanent. Get into the habit of talking to your kids about money. When they're on the computer, pull up a chair and walk through how to check their investment account holdings.
Over time, an ongoing dialogue will teach them important lessons. They'll learn how to make better financial decisions and they'll gain confidence in their abilities. They'll also learn that investing and money management don't have to be complicated.
Graduation time is a perfect opportunity to recognize young people's accomplishments while instilling smart financial habits and confidence. Plus, having a financial stake in the "real world" can inspire new interests, offer opportunities to learn essential life skills, and help teenagers understand how the economy and markets have an impact on their future.
This year, as you search for the perfect way to commemorate the occasion, why not forgo presents that will be quickly outdated, spent or lost, and give a gift that may help your graduate succeed throughout their lifetime?
Dan Greenshields is president of Capital One ShareBuilder. In his 12 years with the company, Dan has served as CFO, an executive officer and also as a member of the board of directors prior to joining full time as an employee. Dan is a Chartered Financial Analyst and a member of the Seattle Society of Financial Analysts.
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