Is five too young for a stock portfolio?

Five is not too young for a stock portfolio but a five year old may be too young to manage a stock portfolio. That's where parents can be useful because the earlier a child gets started with investing, the better off he or she will be when old enough to take over the investments for themselves. What's more, depending on the type of portfolio, the wonders of compounding and the peace of mind of not having to worry about short term economic trends can all pass a 5 year old by while they play with their toys.

Advantages of stock portfolios for 5 year olds: 

When a child is young they are rich in the asset older people don't have, time. Time is money, and converting that time into money involves investing. Since 5 year olds are rich with time, a parent may want to start an investment portfolio to convert that time into money by making wise investments. Choosing the right stocks is the challenge as companies can do all kinds of things including go bankrupt so thoroughly investigating risks, potential rewards, mutual funds, exchange traded funds, brokers etc. is probably all worth some thought. A few advantages of starting a stock portfolio for a 5 year old are listed below:

• Can cause the money invested to grow
• May be a source of financing for the child's future needs
• Is a potentially good money management strategy for the parent(s)
• The child may be grateful later in life
• Reduced stress when the big kid bills come later in life

Types of stock investments for 5 year olds

The list of potential investments for a 5 year old is quite long. Essentially, a parent or parents might consider doing this after they have decided enough extra money is around to start a portfolio for the child. Choosing the right stock investment is a matter of risk tolerance, health, education, retirement and other expectations. Since the child is still young, it is not absolutely necessary to worry about every future need the child may have bet getting a head start always helps. Below are a few investments that may use stocks as an investment instrument:

• Individual Retirement Accounts
• Employer investment plans such as 401K
• Exchange traded funds
• Cash value life insurance policy
• Mutual funds

Managing a 5 year old's investment portfolio

As a 5 year old will likely need assistance in his or her investments, slowly and incrementally getting the child used to the idea of investing is one way to prepare them for managing the money themselves. This however, is not the only strategy, the parent(s) may also choose not to tell the child about the portfolio until he or she is responsible enough to manage it which might not be until they are in their late teens, 20's or 30's.

The purpose of the portfolio is also likely to have an influence on how it is used, converted and/or reinvested later on. If it is a retirement focused portfolio, restricted access and early withdrawal penalties will make re-application of the funds less ideal. If the portfolio is to help the child get started in life, the funds may grow until a certain time period in which they are used. Or it may be a part of a college, vehicle and/or marriage financing plan.

The strategy parents use when investing for a 5 year old is apt to be unique and specific to the needs and financial situation of the parents, the number of siblings, investment know how etc. Whatever the case may be, 5 is not too young to start an investment portfolio for a child. In fact, once a child is born, they are legal entities that can be the beneficiaries of assets which means parents can set up stock portfolios for them even younger than 5. Helping a child prepare for the future through stock investments may or may not be practical for a parent. However, the idea that a child's financial future can be begun young is something that is not too young a thought for a 5 year old.

Why Idioms are Used in Personal Finance

Idioms are used in personal finance for the same reason they are used in life, to accentuate meaning and draw attention to the nature of things, often within figurative phrases. There are several idioms in personal finance, many of which highlight some of the key principles of managing money effectively as well as hinting at the nature of some financial transactions. Financial idioms also express the creative side of a topic that is very often thought of as dry and bottom line in outlook.

• Why the "dead cat bounced"

In the investing world, there are a lot of idioms that summarize investment scenarios into quick and fast meaning. These phrases serve the useful function of getting to the point both when time is a critical factor, and when there's work to be done managing money. Dead cat bounce is one such phrase that captures the meaning of a financial event that would otherwise take longer to express. A dead cat bounce is when the price of a financial security, or group of securities collapses, and then rises briefly before declining again.



• Which animal is better, the bear or the bull?

Bear and bull markets are part of the business cycle, or so it is believed in convention. The animal that precedes it represents each type of market. In the case of a bear market the business cycle has contracted and liquid assets dry up. This could also be a bad time to "catch a falling knife", as some business may be on their way to insolvency in a bear market. Bull markets are the opposite of bear markets, and demonstrate 'bullish' behavior. Bulls are somewhat aggressive, charge forward and do so in volatile movements. The stock market and other financial markets are thought to behave similarly when an economy is improving.

• Chickens lay eggs, but they don't always hatch

If you've never wondered why money put away is referred to as a "nest egg" it is a figurative way of referring to growing money based on a practice that is believed to encourage hens to lay eggs. Nest egg can also be thought of in another way, specifically the care with which the hen protects the egg; keeping it warm, making sure it develops into something more, watching out for predators as best she can and so on. Thus the process of growing and protecting one's money is a somewhat close to the heart matter in so far as the metaphor works.

Another egg idiom having to do with chickens is "don't count your chickens before they hatch". With variable interest rates, unstable economics, inflation, and investments that don't live up to their expectations, there's not always a guarantee that money planned on will be there despite relative financial security. For example, an insurance company might go bankrupt, an investment might turn sour because of an unforeseen event or a job loss might cause one to use up savings. Keeping in mind the chickens haven't hatched yet might add a healthy does of perspective to a financial plan.

• Greed is good

The phrase is trite, and the implication somewhat lacking in benevolence, but when it comes to managing your money "Greed is good", as Gordon Gecko stated in the 1987 Oliver Stone movie 'Wall Street'. The reason why the phrase is even worth consideration is because commerce is such an integral part of the creation, distribution, and retention of wealth. Greed is both an aspect of human nature and economical thought, after all who is 100% not greedy?

• How there is both "Honor and No honor among thieves"

The phrase "No honor among thieves" is sometimes confused with "honor among thieves". Both these idioms speak volumes or at least pamphlets to the nature of finance. Regardless of which is the original phrase, the two have emerged, both with unique meaning. The phrase no honor among thieves, is a reference to the nature of those who seek "ill gotten gains", or in a wider interpretation, other people's money. In doing so, honor may be lost or replaced with the interest in gain.

Honor among thieves refers to those who seek gain in conjunction with one another. In such case the honor among thieves is there, but lost with everyone else in which case there is both honor among thieves and no honor among thieves depending on who the reference of honor regards. So next time you're wondering where the money you thought was safe went, it might be a good idea to recall these two phrases.

Source: http://www.investopedia.com

Investment plans for kids

Piggy banks are good for storing money but the money in a piggy bank doesn't teach a child about interest and inflation. They generally can't pay for college tuition either unless they pennies and nickels are invested very well. If you can teach a child to invest his or her allowance so (s)he can retire before you do, you may have done well in getting them started with investing. This article will discuss a number of different investing plans for kids.

The best time to start investing for a child and teaching a kid about investing is before they are born and during their childhood years. What's more if a child starts learning about investing at a young age they won't have to learn about it when they become adults and discover the real world for themselves. In fact financial planning may be just as important as musical training, physical education, and literacy. This article will present some of the savings and investing options for kids, and then follow up with summarizing commentary.

Child savings accounts

The ideal savings account for a child has no annual maintenance fee, a high interest rate, friendly and helpful customer service and online banking. As in the world of adult banking, some bank accounts are better than others in terms of free stuff for opening an account and free services. Credit Unions offer accounts that meet some of these requirements, otherwise separate accounts with joint ownership can be established by the parent. For example, if a financial institution offers an option to open a money market account opened under the same account number and/or owner as a checking and/or savings account, that money market account can be the child's account. Additionally, the child can learn more about the account by visiting websites such as this.

College savings plan

Eventually a child is going to turn 18 and either enter the workforce, stay at home for a little while longer or go off to some kind of post-secondary education program. For the latter there are '529' College savings plans and Coverdell Education Savings Account (ESA). Money used through these plans are completely tax deductible for parents and tax free for the future student when the money is used for education.

Toy and bicycle funds

A toy and bicycle fund can be a parent managed fund that grows with good behavior and discipline and declines with bad behavior and discipline which are things that also lead to wealth in the adult world. Kids can be updated about the amount in the fund and how much they need to do or receive as gifts to acquire additional gifts and toys. This type of fund will help give children a more constant awareness about the value of money.

Individual retirement accounts (IRA's)

It's never too early to save for retirement, however unnecessary or unrealistic it may be. In fact an annual IRA contribution started at birth at maximum contribution amounts could be worth over $120, 000 by age 29 or the same age young people may start thinking about retirement. If that isn't a head start what is?

A/B Trusts

A/B Trusts are a financial instrument that allow parent's with estates invest their money through a trust that may reduce estate taxes. With an A/B Trust, children inherit an estate with potential tax advantages due to use of the estate tax exemption. With an A/B Trust, the surviving spouse is entitled to a portion of the value of an estate and/or its income and the children of the spouse is entitled to another portion. Since the trust is separated this way, estate taxes are reduced and in some cases done away with thereby increasing the value inherited by the children.

Life insurance policies

Other savings vehicles for kids can include a life insurance policy with cash values that fluctuate and appreciate over time. The mere concept of life insurance during childhood is quite abstract and a real step in the direction of financial savvy if a child can grasp the concept. What's more a child life insurance policy can also benefit parents in terms of being reimbursed for costs associated with accidental injury not covered by health insurance and tax deductibility.

Investment plans for kids is ideally one part of a complete financial education program for children as investing does not include other important financial lessons such as budgeting, expensing, employment income and dealing with financial institutions. Nevertheless, investing plans for kids are beneficial to both parents and children and can prevent potential financial crises later in life. The investment products and ideas presented in this article are just a few of the several investment vehicles available, but do embody some of the more important types of investing i.e. toys, college, retirement, and tax savings.

Ways to Teach Kids About Growing Money

The more a child is exposed to financial concepts at a young age, the more potential they have to learn about growing money. Financial education is more than just about depositing and withdrawing money from a bank, it is also about investing, balancing budgets, buying and selling, and planning financial goals. These concepts can be integrated through games involving money, allowances, real life trade and financial planning.

• Work ethic and financial responsibility

If a child is taught that good grades, working around the house and behaving well earns money, and they receive the majority of their money from such actions they are more likely to do things that will earn them money. Keep in mind kids are kids and may simply choose not to do a task unless they are encouraged or reminded repeatedly, but if they want something bad enough they are morel likely to work for it.

• Budgeting

Budgeting can be taught through allowing kids to manage their own expenditures via a parent sponsored kid fund. Continuing with the step above a child can be taught through repetition and consistency that when they do good things the value of their "kid fund" or whatever name it is given goes up. When they want something, they can learn about true cost in the real world and how that will affect the balance on their fund. This is not to say kids should not get gifts every now and then, but it is to say if they want more than birthday presents, Christmas gifts and the occasional good will, they'll have to budget for it.

• Trade and barter

When kids don't want old toys, eBay can be a great way to teach them about buying and selling. By auctioning the old toys on eBay, they can learn how to sell and use the proceeds from the sales to either save, invest or make new expenditures on new toys and other items on eBay for a possibly lower cost than retail. This can also teach cost cutting and comparison shopping.

• Investing

Another important lesson kids can learn about growing money is investing. Concepts like interest, saving, and managing money for growth can be taught through financial video games and board games, child savings accounts, and actual investments such as bicycles, toys, comic books, collector stamps, coin collecting etc. Many of these things may appreciate in value over time or be valued by other collectors making them investments that may or may not appreciate in value. This helps instill the lesson of investing wisely and/or investing for gain.

Kids can be taught about growing money just like they can be taught how to read, play a musical instrument, add and subtract etc. It really isn't that different and the younger they are when they learn such things the better. What's more, by using the methods in this article consistently a child is bound to learn at least one or two things about growing money that he or she might not have learned by not participating in the activities, some of which are actually fun.