Essential Stock Market Lessons for Your Tween

It used to be a rite of passage: taking a child down to the bank to open a savings account, or giving a few shares of stock. This was supposed to instill a lifetime habit of saving and investing, reinforced by watching the “magic of compounding.”

Today the lesson can backfire, since interest earnings are so small and stock-market gains so volatile.

The average savings account pays just 0.229%, according to the BankingMyWay.com survey. At that rate, $100 would grow to just $100.23 in 12 months, a very long time to a child of eight or 10.

Twenty-three cents doesn’t buy much. And a completely candid parent would explain that, with inflation taken into account, the child would really be losing money by saving.

There are several ways to reinforce the saving-is-good lesson under such circumstances.

Clearly, the first is to shop for a better rate. Ing Direct (Stock Quote: ING), pays 1.3%, for example, and UFB Direct 2%. Use the shopping tool to find others.

Next, a parent can emphasize that interest earnings aren’t the only reason to save. By forgoing small pleasures like candy bars, your child can build a fund for something much more satisfying, like a computer game.

Another option: Bypass the real banking system and set up an informal one at home, offering a more generous interest rate. For an 8-year-old, you could pay 5% a month, gradually reducing the rate until the child reached 11 or 12.

If you liked this article you might like

Why You May Not Want to Pay Cash, Own Your Home Free and Clear

Now You Can Get That Home Equity Loan in a Comfortable Hybrid

If Retirement Health Care Costs Look Scary, Try These Tactics

Why Buying Bonds With Negative Yield Isn’t as Weird as It Sounds

Investors Turning to Dividend-Paying Stocks See Benefits of Buybacks, But Must Heed Caveats