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1/25/2004

A penny at a time

By Kristi Mehlhoff
The Daily Times-Call

Dropping coins in a piggy bank may not seem like a worthwhile plan to save for your future, but implementing this idea with your children may be the key to their financial future.

Rob Eldred, personal financial advisor and agent for Allstate, said parents who set a good example for their children through saving and money management will pass those skills along to their children.

“Teach them early the responsibility and the results of their continuous investing,” he said.

Eldred said the first step in teaching children about money is opening a savings account where they can deposit their allowance or other money they receive. But because many children are too young to understand the aspect of retirement, Eldred said children could set up the account with a goal of saving money to purchase something they desire, such as a new bike or a compact disc. There should be some result of the savings for children, usually an item they want, he said.

Trish Weickum, investment solutions manager for Community First National Bank, said the amount of money saved doesn’t have to be a significant amount to help the child understand the basics of saving and investing. Even purchasing a sought-after CD for only $15 will make a child realize the reward of saving, she said.

As important as it is to teach children about saving, parents should also include children in talks about investing. Of course a child will need to have an understanding of money to know what is being discussed. Weickum said parents may want to include their children while reviewing their investments and how much money is involved. This inclusion gives the child an idea of the terminology used when talking about money, which in turn will help him or her in the future.

“It’s generally said that if children are properly educated and receive help on how to manage their money, they are more apt to be financially responsible earlier in life,” Weickum said.

She said many people grow up being afraid of investing and its terminology because they haven’t been educated. If children have at least a small amount of knowledge about investing, Weickum said they will be more comfortable talking with a financial counselor later in life.

When making the decisions about what to invest, Eldred said it’s important parents make decisions about investing that will spark an interest in a child, such as purchasing stock in Disney, Nabisco or another familiar name. He said children will get more excited about the aspect of investing in something if they have an interest in it and can say they own part of Disney, for example.

But there are many options available for investing besides stocks. Eldred said savings bonds are an easy way to start saving. While easy to purchase at most banks, Eldred said the appreciation on savings bonds is limited, but they’re better than not investing.

If a parent wants to teach a child a long-term idea of investing, Eldred said to invest in a mutual fund, which is a collection of stocks and bonds managed by a professional money manager. He said because the professional has a pool of money being invested, by you and other people, a mutual fund gives investors more buying power and some diversification. A mutual fund gives people the potential for real appreciation, he said.

If a child is only a few years from the start of college and wants to have a quick return on the money, Eldred said certificates of deposits offer children a way to invest money and earn on it, without being tied into a long investment. Money is built upon the CD’s interest rate. Usually, CDs can be cashed after a certain increment of time, such as six months.

A money market account is another option Eldred suggested as a way to keep a higher balance and in turn earn more dividends on the investment. A money market account also
allows a few checks to be written each month.

Checking is another option parents may want to explore for their children. Eldred said a checking account gives a child the first steps of handling money. This may be a good option for a teen-ager once he or she gets a job.

It’s also vital parents teach children about credit. Eldred said it can sometimes be dangerous to give a teen-ager a credit card, but if a parent agrees to it, he suggested setting a low limit and reviewing the bills monthly to discuss the expenses occurred.

“The biggest path to guaranteed success in your investment world is controlling your expenses,” he said.

Weickum agreed keeping debt under control is important for people to reach financial independence, and starting early to teach children about savings, investing and debt management is the critical part of the entire process.

In addition to the benefits of educating children about saving and investing, Weickum said parents may receive tremendous tax advantages for starting early.

“A lot of tax advantages are available now for parents who begin saving for their children for college,” she said.

With the increasing costs of college education, Weickum said parents need to begin saving for that point in their child’s life at birth.

Eldred said the whole secret to investing is time.

“The surest path of results is starting early and systematically continuing to do it,” he said.

Kristi Mehlhoff can be reached at 303-776-2244, Ext. 275, or by e-mail at kmehlhoff@times-call.com