The Best Gift You Could Ever Give

Co-produced with Beyond Saving

Christmas is behind us, though many of us have families that get together later than the traditional date. Time and distance often conspire to make it difficult to exchange gifts precisely on Christmas Day with the ones we love.

I love shopping for Christmas presents. I try not to be one of those that show up with a pile of gift cards or buy things that fall into the category of “It’s the thought that counts”. I enjoy really thinking about it and trying to hunt down something that the recipient will really enjoy. Better yet, if it is something they never even thought of themselves.

But I’ll be honest, some years are more successful than others. Little is more rewarding than coming up with that one thing to give to a loved one that becomes a permanent part of their life. But it isn’t easy, and it isn’t realistic to come up with the greatest present every year.

When I think back on all the Christmas gifts I have received, I don’t even remember most of them. We get things, we use them, and we discard them. Maybe it is because they wore out, or maybe because we are moving and have to decide what is important and what has just been sitting in the closet for the past decade.

Yet there is that handful of presents we will receive throughout our lives that have a huge impact. Some gifts might spur us to explore a new hobby that becomes a lifetime passion. Above my desk sits a painting of one of my deceased dogs, given to me as a Christmas present – an emotionally touching gift I treasure daily.

Most gifts have a temporary impact on our lives. A handful will have a meaningful and permanent impact on us. The only thing better than receiving such a gift is being the one to come up with the idea and to give it.

I can’t help with every member of your family, but I do have a potentially life-changing present for the children in your life. Your kids, your grandkids, or even your great-grandkids could benefit.

Open a brokerage account in their name

No, don’t throw tens of thousands of dollars into it. This gift is not about “giving money”. It is about teaching healthy investing habits. A scary number of people find themselves utterly unprepared for retirement, and the largest reason is they never saved.

The goal is to inspire them to put some of their own money into the account. How do you do that?

Start small

Start it with maybe $100. In the days of free trades, you don’t have the friction expenses that used to require large trades. $100, spread across half a dozen stocks. Keeping it small will make it a realistic amount that they will feel their contribution to it will be meaningful. If they invest $10 into a $100 account, they increase it by 10%. If it is $10,000, their contribution won’t move the needle.

If you just throw thousands of dollars in an account, they will just wait until they are 18, take it out, and spend it on things 18-year-olds think are important. I don’t know about you, but when I was 18, I wasn’t making the wisest financial decisions!

Remember, the goal is not just to give away money. You can do that with a gift card. The goal is to inspire them to take the road of investing for the future. That way, if you are leaving a sizable legacy for them to inherit, they will already be fiscally responsible and have a good set of financial skills.

Invest it into dividend payers

My regular readers will be surprised by this suggestion!

I think this is really important because it will help them develop a healthy investment mindset instead of gambling. Set up the account to deposit the dividends as cash and let them decide where to reinvest it each month. Making it interactive will encourage them to be active participants instead of just passively waiting to get their hands on the money.

Dividends will provide them with a tangible return, even when the market is down. The market could easily head down more next year. You don’t want them to become discouraged and give up on investing before they even start.

Track the income

Let them see how much income is coming in every month. Instead of obsessing about price swings, tracking their income will encourage them to invest more. Too many investors “lose money” when prices fall and get discouraged. Their solution is to stop investing because it is “too risky”.

It is sad how many people have told me some version of “the market is a casino” as their excuse for not saving for the future. The American economy is the single greatest wealth generator in the history of the world. We are all very fortunate to have the opportunity to own part of it. If investing is gambling, you are doing it wrong.

Let them take out a percentage

Delaying gratification is a hard skill for adults to practice. It is nearly impossible for children. If they get nothing out of it, they will be more likely to quit.

While reinvesting 100% would cause faster growth, they are 50+ years away from retiring. Time is on their side! Set up maybe 50% of the income (not selling shares of the principal) to be deposited into a savings account so they can take out the money.

Maybe they will surprise you and decide to reinvest it. Giving them control over that decision will provide a sense of ownership over the account and develop responsibility.

Additionally, seeing the income come into their account every month, no matter what prices do, will help them avoid the mindset that buying stocks is gambling.

Match their investments

You want to encourage them to invest their own money. There are many ways you could provide an incentive for them to invest. One is to take a page out of the old 401k. Offer to match new capital they invest. This will make them see a greater benefit from the modest amounts they have available to invest.

I think it is really important for them to be putting their own money in. It will increase their sense of ownership and will build healthy savings habits. Offering a little incentive is a great way to encourage this.

Set reasonable and obtainable short-term goals

Set goals with some kind of incentive. Maybe it is a goal to contribute $X in new capital. If their allowance is $50/month (I have no idea what a “normal” allowance is these days!), set a goal for them to save $10/month for six months for some reward.

As they build their portfolio, encourage them to set income goals for themselves. The important thing with goals is that you want them to be a challenge so that they have to work towards it, but you also want them to be obtainable. An impossible goal is discouraging. A difficult goal is motivating.

Be Involved

This is not a give-and-forget kind of gift. Talk to them. Encourage them. Review their “portfolio” with them. Remember to keep things simple. Don’t bore them with numbers and complicated explanations. Keep it fun, and point out the companies they own and are paying them. Take them to the places they have invested in.

Let them make mistakes. To some extent, we all had to learn and pay tuition to the School of Hard Knocks. It is better for them to do so with amounts of money that are very small compared to their lifetime earnings. If they want to buy some investment just because it is “cool”, but is a disaster in the making in your opinion, let them.

Be active in advising and educating. Don’t seize control and force them to do what you believe is best. The older I got, the smarter my father was! Some children will only learn that a stove is hot from touching it.

Things like reading balance sheets and valuations will come in time. It is about teaching good investment habits, but if it also builds a closer relationship between you, that is a happy side effect!

Conclusion

Give a portfolio to a child or teen, and their initial response probably won’t be enthusiasm. Especially when they learn they can’t take the money out immediately to spend on their favorite game or a new cell phone. It is one of those presents that might not be fully appreciated immediately.

It is on you to make it fun for them. You probably live within driving distance of one of EPR Properties’ (EPR) many fun locations, or properties owned by other great monthly dividend-paying REITs like Realty Income (O) or W.P. Carey (WPC). Take them to one of the properties and explain they are part owners of the property and are collecting rent. Like a live Monopoly game!

Buy stocks that they can connect to, this will make their ownership experience tangible.

Enthusiasm is contagious if you are willing to share it. Consider sharing your enthusiasm with those of you who have young ones. The school system is doing an abysmal job teaching responsible personal economics. It falls on us to teach them the path to financial freedom.

As a parent, grandparent, or great-grandparent who has obviously learned lessons along the way (you are smart enough to be reading this!), you can give one of the greatest gifts of all. Getting started investing early can create positive habits, responsibility, and knowledge that will benefit them for the rest of their lives.

Don’t just dump a bunch of money at them – give them just enough to get them started and let the income bug bite. Get them excited about it, and make them manage their portfolio so that the rewards are earned, and they are theirs. In their youth, they might look at you like you are nuts. When they get older, I assure you they will remember the lessons as one of the most valuable gifts they have ever received.