For every monetary birthday or holiday gift, our family has a simple rule: our children may spend half of the money but must save the other half to invest. Yes, my daughter did buy a Costco-sized box of potato chips, and my son bought the largest bag of miniature chocolate hearts I have ever seen; but, in January 2017, the second step of the plan was set in motion when each child bought two shares of The Walt Disney Corporation for each of their trust accounts.

We’ve established brokerage accounts for each of our children to help them learn to manage money, invest, and harness the power of compounding returns. By teaching them to invest at an early age with a small amount of money they will develop good investing and saving habits. Many adults seem to be intimidated by investing, but it is not dissimilar to swimming or riding a bike – the more often you practice the more comfortable you will become as an investor, swimmer, or cyclist.

Save Half of Every Gift

Establishing a rule to maintain a specific saving rate encourages our children to save a portion of their income. As they become responsible for their own living expenses, their savings rate will decline, but half is an easy fraction to calculate for a five-year-old; we want to develop good habits with simple tactics.

Stocks, Not Funds

Investing is a rather abstract concept. We own shares of Starbucks, but we still have to pay for hot cocoa; we are not free to act like we own the place. During each visit Starbucks, I remind the kids we own a small portion of the store, and we earn a small portion of the money each patron spends.

Mutual funds add another level of complexity in the ownership relationship, and, were I to explain the function of mutual funds, my children would lose interest before I could say “instant diversification.” We sacrifice diversification for simplicity. 

Furthermore, I leverage our ownership to encourage good behavior. Though he usually needs to be reminded, our five-year-old understands fellow patrons are more likely to enjoy their visit if he is well behaved – which translates to repeat business and more money for Legos!

How Often Do We Invest and How Much

We invest every quarter. By investing four times each year our children will be investing new capital at regular intervals. When they are older and have a better understanding of investing, we may choose to invest every month, but for now we will pool gifts between our quarterly investing intervals to keep the process easy and fun. Once per quarter will be sufficiently infrequent to pique their interest but we may incorporate ice cream, too.

In January, we invested roughly $200 in Disney, buying two shares for each account. Two hundred dollars is a feasible amount for our family; no, it is not a significant amount of money, and you may choose to invest more. This process is to help our children develop desirable investing habits– I anticipate mistakes and hope for successful investments. An extra 20 years of compounding returns will be the icing on the cake.

How My Children Select Their Own Investments

Honestly, my wife and I can take no credit for developing this approach to investing with our children. I basically stole the process from The Motley Fool’s Jason Moser. Jason, my kids will thank you when they achieve financial independence.

Each quarter I present four attractive companies that they recognize, and our two little portfolio managers select one company to add to their portfolios. In January my children had a choice between Disney (NYSE:DIS), Starbucks (NASDAQ: SBUX), Hasbro (NASDAQ: HAS), and Costco (NASDAQ: COST). Disney, the driving force behind their favorite content, handily beat our favorite place to buy a cup hot chocolate, our favorite toy maker, and our favorite grocery store (the kids love to eat pizza in the cart while I push them around Costco’s warehouse).

To ensure a small degree of portfolio diversity, Disney, or any future selection, will not be available for investment for a full year. If we choose buy more shares of Disney, our children will need to wait until 2018.

Process, Habits, Learning, Financial Independence

The ultimate goal of this endeavor is to help my children become financially literate, confident, financially secure, and, eventually, financially independent. Our process will instill good habits and help our children stomach the market’s volatility. If you have any questions or advice regarding our approach, please write to me at beau@beaubuchmann.com.