Jonathan Clements Staff Reporter of The Wall Street Journal

Updated April 17, 2002 12:06 p.m. ET

If you show your kids how to change the oil on the car, you might save them $50 a year. But if you teach them to invest, you could save them from a lifetime of financial grief.

How do you prepare your children for the financial demands ahead? Every kid, I believe, needs to learn two key lessons: how to save and how to stomach risk.

Here’s how I have gone about teaching those lessons to my two kids:

Children grow up spending their parents’ money. Not surprisingly, buying more always seems like a good idea. After all, it isn’t costing them anything.

What to do? Whenever I get the chance, I offer my kids the choice of whether to save or spend, so they appreciate the financial consequences of their decisions.

For instance, when my nine-year-old son recently headed off on a school field trip, I gave him $4. But instead of asking for the change, I told Henry he could keep any money he didn’t spend. Henry still blew most of the $4 at the nature center’s gift shop. But I like to think he parted with the cash a little less eagerly.

Some years ago, a reader told me about a similar ploy, which I have also used with my children. Bothered by the hefty price that restaurants charge for soft drinks, the reader gave his youngsters a choice. They could have a soda or they could have $1 to spend later. The kids were soon regularly asking for water.

Home Work

Here are three low-cost options to get your kid started in investing:

• Go to www.mfea.com. It lists funds that will waive their minimum, provided you commit to investing $50 a month.
• Buy stocks through www.sharebuilder.com. which charges just $4 a trade.
• Purchase shares directly in companies using their dividend-reinvestment plans. For more information, visit www.netstockdirect.com .

Clearly, you shouldn’t push the notion of delayed gratification too hard, or you risk squeezing all spontaneity out of your children. Nonetheless, a healthy dose of self-control is important. Many adults struggle their entire lives to restrain their spending, as evidenced by the pitifully low savings rate.

While I push my kids to think carefully about how they spend money, I still haven’t settled on a good strategy for how they should earn their cash. I refuse to pay them for doing chores, because I figure they should help around the house without financial inducement.

I also discourage my 13-year-old daughter from spending too many hours babysitting and, when Hannah gets older, I don’t particularly want her working at the local mall. To kids, the money earned may seem seductively large. But I would rather my children devoted the hours to getting good grades.

My current strategy: If my kids want extra cash, they have to lace up their running shoes and do a two-mile loop, for which they get $2. Henry and Hannah, of course, complain loudly on their way out the door. What financial lesson does all this running teach them? I have no clue. But they do seem to be getting faster.

Taking Chances

If my kids are going to earn high returns later, I figure they need to get used to taking risk now. Partly with that in mind, I have three pools of money for Henry and Hannah.

First, there is the money saved for college. Occasionally, I show Henry and Hannah the mutual-fund statements when they arrive.

Picture the scene. I earnestly explain that the account’s value is calculated by multiplying the number of shares by the net asset value. They do their best to appear profoundly bored.

Second, there’s the low-cost variable annuity I bought for each of my children. Variable annuities usually aren’t the most desirable investment vehicle, because of the hefty fees. Indeed, I would rather have opened individual retirement accounts for my kids. But to fund an IRA, you need earned income, which Henry and Hannah lack.

Why buy the variable annuity? When my kids get out of college, I expect them to struggle through a few lean years. They will probably learn more balancing their checkbook than I could ever teach them.

But I also want Henry and Hannah to have a sense of financial security and I want to give them a head start on retirement, so they have the leeway to pursue a less-remunerative but possibly more-fulfilling career.

Which is where the variable annuity fits in. Currently, Henry and Hannah’s variable annuities are each worth some $13,400. That won’t be enough to pay for retirement. But it will sure help.

After 50 years of tax-deferred compounding at, say, five percentage points a year above inflation, their accounts might grow to $154,000, figured in today’s dollars. But until then, Henry and Hannah will be discouraged from spending the money, thanks to the tax penalty on withdrawals before age 59.

As with their college funds, I occasionally show my kids their variable-annuity statements. But that also generates extravagant yawns. Instead, what my kids really care about is our investment competition.

Which brings me to the third pool of money. Inspired by yet another reader’s e-mail (yes, I do read them all), we started the competition two years ago. My kids and I each picked from a selection of low-minimum funds. Every month since, I have invested $40 or $50 for each of us.

The bear market has ravaged those monthly checks, so that each account only recently broke above the $1,000 mark. But Henry and Hannah aren’t much bothered by the losses. Instead, what they care about is their relative standing.

Hannah, who opted for a value-oriented fund, is in the lead, while Henry’s go-go growth fund lags far behind. And what about my foreign-stock fund? It has spent most of the past two years tenaciously hanging onto last place.