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Kids and Investing

Question: I started savings accounts for all three of my kids after they were born, putting a small amount of money from my paycheck into their accounts. I have about $2,000 to $3,800 in each of the accounts and think perhaps I should think about doing more than a simple savings account. I have thought about purchasing stock; some time ago, I almost purchased Pixar for Bobby, but then they remarried Disney. I thought purchasing stock may get them interested in the market and finances, etc. I also have information on the Vanguard 529 plan. My husband and I have approximately $37,000 in my 403(b) and a Roth IRA. We also have some Apple stock, but that's it besides the checking account. I am 40 years old; my children are 7, 6 and 4 years old. I would love your input. Ellen

Answer: What you are already doing is wonderful. One suggestion going forward is to divide your children's money into two pots. One pot is for a 529 college savings plan. You can invest in a 529 college savings plan in your state or any other state. And the savings can be used at any college--public or private. The savings plan is funded with aftertax dollars. But the money grows tax free.

Now, there is a fair amount of choice when it comes to the investment portfolio. But most choices involve mutual funds type options. The choice I like the most is called age-based investing. When your child is young, the portfolio mix is heavily oriented toward riskier stocks. As your child ages--far too quickly, I might add--the portfolio becomes more conservative. And the portfolio changes automatically. You don't do anything. Anyone can contribute the child's account--including parents, grandparents, relatives, and friends.

Now, here's the real kicker: When you withdraw the money it's tax-free, so long as it is taken out to pay for qualified educational expenses--like tuition. 529s even get favorable treatment under the current financial aid formula. If the money is counted at all, it's assessed as a parental asset. That means only 5.6% of it is counted in the financial aid package.

The big drawback of a 529 plan is that it doesn't really teach your kinds about investing. And that's where the second pot of money comes in. I would encourage you to buy individual stocks with your children. The stock market also opens up a whole new way of looking at the world, from the creativity of designing new products to the economic bridges linking the globe. Along the way, exploring the world of investing with your youngster might lead to another activity and conversation to share together.

Picking stocks is a lot more fun than putting quarters into a piggy bank or dollars into a savings account. What shoes are your children's friends wearing--and what company makes them? Do they prefer Pepsi or Coca Cola? Who's going to win the video game wars--Sony, Nintendo or Microsoft? Concerned about the environment? Whatever your children's passion or interest, there are public companies to research and follow on the Internet and in the newspaper.

To be sure, I have no clue whether your children will make much money, although they will probably do okay. But they have the excitement of identifying with a product, researching the company, watching the stock fluctuate, and reading articles about the company. And the Internet has truly cut down on the costs of buying and selling stocks. Have fun.

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