Teaching Your Kids About Money - Part 1

If 14-year-old Damon Williams can become an investor, and accumulate $50,000, so can you. Williams, a member of a junior investment club in Chicago, has been learning about stocks, mutual funds and other investments since he was six. Currently he is featured on an episode of the public television series, MoneyTrack, entitled “Kids and Investing."

He is an excellent example that when it comes to teaching your chidlren about money. Kids are never too young to start learning about the importance of money and how to start saving for their futures.

Talking to your kids about money requires that you explain the concepts in ways that they can understand. When they realize that money decisions determine 90% of the decisions they make in life, such as whether or not they can afford to spend time with their friends; where they buy their clothes; whether they can purchase one music CD this week or two, the concept of saving and having money will become very important.

Here is a simple overview of how to begin the conversation with your kids.

Explain That There Are Two Ways to Make Money
People at work and money at work

• People at work — that's when you work at a part-time job, cut the lawn, earn money. We all do it. Most adults work about 40 hours a week, 50 weeks a year, for 30 or 40 years.

• Money at work — that's when you put aside a portion of every dollar you earn or receive. If you invest it wisely, this money can make money for you.

Kids can start learning about stocks, mutual funds and other investment vehicles, from the following sources:

• Parents

• Talk to your school about setting up an investment club

• Visit Web sites about investing for minors

• Have a goal - Perhaps it is to retire at age 30; to take the pressure off your folks and pay at least a portion of your own college education; or to sock away enough money for your first car. Decide the amount you need and the date you want the money to be available.

Include Your Children in Saving for their Future
You have a number of options

• Develop a system for you and your child to put money aside on a regular basis. Let's say your child has a job and a goal to have $500 for a new _________ (you fill in the blank here) two years from today. That means (ignoring interest your money may earn) you need to set aside just under $4.81 a week (4.81 x 104 weeks = $500.24).

• Figure out where the money will come from. Some minors take a percentage of everything they earn or receive (such as 20%) and put it toward their wealth-building goal. Others talk to their parents or grandparents about "seed" money (an initial amount of money invested to build wealth).

• Select investments that interest your child, whether it is shares of their favorite apparel store at the mall, electronic game manufacturer, computer, etc. When an individual buys ten shares of, say, Dell Computers, explain that this makes your child a part owner in the company. That's also why some minors put companies such as Disney, Nike, The Gap and McDonald's on their stocks-to-study list.

• Stick with quality. That goes back to doing your homework. Remember, the goal is to make money, not lose it. Find a company you and your child likes AND that looks to be a quality investment. Please keep in mind that with any investment, there is the risk of losing money. Steer clear of hunches or companies that simply have names that sound intriguing.

• Get good advice. There are a lot of people who can help you learn and made good decisions. One place to start is with a company like Alero Equities. Together with your parent or grandparent, our representatives can discuss your goals and offer direction and guidance.

Remember This: Money Begets Money
Take advantage of compound interest.

Put the money into a reliable vehicle and let it work for you. Slow but steady won the race between the tortoise and the hare. In other words, don't expect to make a fortune overnight. Successful investing takes time and patience. Forget stories about instant riches. Set up a plan and stick to it. That's the best way to help assure your long-term success.

The bottom line: Now is the time to begin teaching your children about the ins and outs of investing and wealth building. This helps you lay the foundation today for your child's long-term financial security. Contact Alero Equities at 1-866-354-5125 to schedule an appointment to discuss you and your child's investment plan.

Alero Equities Knows Where to Park Your Cash (In 2009)

Now's the time to invest! David and Tom Gardner's new book reveals their strategy for million dollar wealth.

You have money, you need a place to put it for a while and the financial institutions are lining up at the door. You may be tempted to fall for whatever suitor makes a good first impression, but remember: This choice is all about you.

The best short-term savings account is the one that best matches your needs in the following areas:

Access: How often will you need to dip into the account, and what's your preferred method of access -- ATM, check-writing, online, and the like?

1. Interest: How much will the institution pay you for babysitting your money, and does the amount you need to park in the account qualify for the best rates?
2. Service: Might you require bells and whistles, such as in-person customer service, or are you more of a DIY, low-maintenance customer?
3. Penalties: Should your plans change -- you need to get to your moola sooner than planned, for example -- how harsh of a punishment will you need to endure?

Now, let's review the major aspirants:

Checking accounts

Checking accounts are meant for transactions, not savings. That's why many don't pay much, if any, interest. However, some banks do combine the conveniences of checking with the return of a money market account. Also, as "asset management" accounts at brokerages become more feature-rich -- offering unlimited check writing, ATM access, and money market rates -- more folks are shunning the banks in favor of brokers.

Pros

Your money is only a check or an ATM machine away.

• A bank branch is usually not far, often in your grocery store, if you're so old-fashioned as to want to deal with a human being.

• As with all bank deposits, checking accounts are insured by the Federal Deposit Insurance Corp.

Cons

• Depending on the bank, you may not earn much, if anything, on the money in your account.

• Many checking accounts require a minimum balance or charge fees, or both, which are a pox upon your pecuniary patience.

Savings accounts

In the old days, savings accounts -- or passbook accounts, as they're sometimes known -- were the most popular rest area for short-term savings. Fortunately, folks are getting smarter and parking their pelf in higher-yielding investments. The pittance you earn in most savings accounts isn't enough to even keep up with inflation.

Pros

• The money in a savings account is insured by the FDIC.

• Account minimums are often low.

Cons

• The return on savings accounts is so low, some mattresses pay more in interest.

High-yield bank accounts

Nowadays, you can find high-yield savings and checking accounts. They're an ideal place to park money for your monthly bills. They offer flexibility (you can add or withdraw funds at any time) and liquidity (your dough isn't locked in for a specific time period). Some even boast interest rates on par with more restrictive investments like CDs. The best rates by far are offered by online-only banks that keep costs low by cutting back on frills.

Pros

• Better rates than many standard bank accounts.

• Same FDIC insurance applies to high-yield accounts.

Cons

• Bare-bones banks with no ATM/debit access or check-writing privileges can be a big hassle if you need your cash fast.

• Customers must coordinate their cash flow by transferring money back and forth from the online bank to a linked checking/savings or brokerage account. That means delays -- two to five days -- before everything's reconciled.

• Watch out for limited-time teaser rates by researching the product's six-month interest rate history.

Money market deposit accounts

Money market deposit accounts are offered by banks, usually require a minimum balance, and permit a limited number of transactions per month (six transfers, three of which can be checks written on the account).

Pros

• Money market deposit accounts are very liquid. Most allow for easy access through checks, transfers, and even ATMs.

• Because they are offered by banks, money market accounts are insured by the FDIC.

Cons

• Unfortunately, you may pay for the liquidity by receiving less in return than from certificates of deposit.

• If your account falls below the minimum required balance, or you exceed the limited number of transactions, you might pay a penalty.

Money market funds

Money market funds are offered by brokerages and mutual fund families. These funds invest in highly liquid, safe securities such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations).

Pros

• With a money market fund, you can have the money in your hot little hands very quickly. Often, you can write checks or use an ATM card.

• The returns on money market funds are typically higher than the return on money market accounts.

• Issuers go to great lengths to keep the NAV (the price of each share of the fund) at $1, so your principal is relatively safe.

Cons

• Money market funds are not FDIC insured.

• There is no guarantee that the NAV will remain at $1.

Certificates of deposit (CDs)

CDs are debt instruments with a specific maturity, which can be anywhere from three months to 60 months (i.e., five years). Most CDs are issued by banks, but they can be bought through brokerages.

Pros

• CDs are very safe because most are offered by banks, so they are FDIC insured.

• Depending on how long it is to maturity, CDs may pay more than money markets.

Cons

• Your money is off-limits until the CD matures. If you must, you can redeem the CD early, but you'll pay a penalty.

U.S. government bills or notes

"Treasuries" are backed by the full faith and credit of the U.S. government. Treasury bills mature in less than a year; Treasury notes mature between two and 10 years.

Pros

• Treasuries are considered the safest investments in the world.

• They can be bought directly, commission-free, at TreasuryDirect.

• They are exempt from state and local taxes.

Cons

• If you shop around, you might get a better return from money markets, CDs, and corporate bonds.

• If you need your money before the security matures, you may not get back all of your original investment.

I Bonds

No, they have nothing to do with the Internet. I Bonds are inflation-indexed savings bonds issued by the U.S. government. The amount an I Bond pays is adjusted semiannually to keep up with inflation and protect the purchasing power of your money.

Pros

• I Bonds are backed by the full faith and credit of the U.S. government.

• The "I" in I Bond protects your investment against inflation risk.

• They are sold in manageable denominations, ranging from $50 to $10,000.

• They can be bought from most financial institutions, including TreasuryDirect.

• The earnings are exempt from state and local taxes, and can be tax-free if used for post-secondary education expenses.

• Taxes on earnings can be deferred for up to 30 years.

Cons

• You must hold an I Bond for at least 12 months, and you will pay a penalty of three months' earnings if you redeem the bond before owning it for five years.

Municipal bonds

Municipal bonds (or "munis," as the big talkers refer to them) are issued by state and local governments in order to build schools, highways, and other projects for the public good. Municipal bonds are most attractive to high-income investors looking for tax-friendly income.

Pros

• Munis are just a step down from U.S. securities in terms of safety.

• Income is exempt from federal taxes, and might be exempt from state and local taxes if you live in the municipality that issued the bond (check on the tax implications beforehand).

Cons

• Interest from munis is relatively low. Unless you're in a high tax bracket, you'll usually get a better return from other investments.

• You may have to pay a commission to buy municipal bonds.

• If you need your money before the bond matures, you may not get back all of your original investment.

Corporate bonds

Corporate bonds represent debt issued by companies, from the blue chips to the "cow chips," if you know what we mean. The more creditworthy the company, the less it'll pay in interest. Moody's and Standard & Poor's rate companies as to their ability to meet their debt obligations. Only short-term bonds are appropriate for short-term savings.

Pros

• Corporate bonds usually pay more than government securities, money markets, and CDs.

Cons

• The company that issued the bond could suspend interest payments, or even go belly up.

• You may have to pay a commission to buy bonds.

• If you need your money before the bond matures, you may not get back all of your original investment.

Bond funds

Bond funds are mutual funds that pool the money of investors to buy bonds of all stripes.

Pros

• They are an efficient way to buy bonds in small increments and get the diversification that minimizes the risk that you picked a bond from a deadbeat company.

Cons

• The NAV (i.e., the share price) of a bond mutual fund fluctuates, because of interest rate movements and the bonds bought and sold inside the fund. Therefore, you're not sure exactly how much of your original investment will be around when it's time to take your dough. Likewise, the yield on a mutual fund fluctuates.

• You will pay an ongoing expense to own the fund, called the "expense ratio," and you may have to pay a commission, called a "load."

This story is adapted from a Robert Brokamp article. It has been updated.