Best Way To Teach Your Kid about Investing
While it’s possible that your child’s high school has a personal finance or investing class, Moreover, they probably won’t have the opportunity to take it until their junior or senior year. That’s too late. In contrast, teaching your child sooner will ensure a greater level of financial sophistication.
Meanwhile, would your financial situation be different today if you had received meaningful instruction in your childhood?
Keep these tips in mind:
1. Share age-appropriate information: A confused mind shuts down quickly. Therefore, keep the information at a level your child can understand.
2. Your child might not listen to everything you say, but he is watching you: If you say one thing and do something else, you’ve shot yourself in the foot. Kids don’t always listen, but they do notice things. Therefore, follow your own advice or you’ll lose your credibility.
3. Emphasize that investing is a way of making your money work for you: For instance, there’s a big difference between allowing your money to languish in a bank account and investing wisely. Over time, this difference becomes larger and larger.
5. Keep a long-term focus: Likewise, children naturally have short attention spans and want to see big returns immediately. Therefore, explain that smart investing requires years to see the best results.
You might think that investing is a dry topic that wouldn’t appeal to children. However, most kids are fascinated by money and would love to further their understanding. It’s important to lay the necessary groundwork before making that first investment together.
‣ LAYING THE GROUNDWORK
Teach the basic information every budding investor needs to know:
1. Teach your child about interest as it relates to financial returns. In the case of a CD, savings account, or bond, interest is a fee paid for the privilege of using someone else’s money. Interest is a form of rent in those examples.
‣ Use an online calculator or a spreadsheet to demonstrate the power of interest over longer periods. Compound interest is magical!
2. Explain the rate of return for a stock investment. Give concrete examples. If a stock was priced at $10 and 12 months later is priced at $12, the value has increased 20%. This concept is too challenging for younger children.
3. Explain the basics of the stock market. A stock market is a place that permits investors to buy and sell small portions of ownership in many different companies. When the shares you own increase in value, you can sell
4. them to someone else for a profit. The opposite is also true. It’s possible to lose money.
‣ While there are many theories about why a stock may rise or drop in price, present it to your child as an indicator of value. When a company becomes more valuable, the stock price rises. When the value decreases, the stock price falls.
‣ Use easy-to-understand examples. You could explain that a shoe store becomes more valuable when it sells more shoes.
5. Explain how bonds work. Teach your child that a bond is issued in exchange for money. While bonds can be a complicated topic, they can be explained in simple terms: “Companies will pay you if you let them use your money.”
‣ Depending on the age and sophistication of your child, you could cover a few additional terms:
- Credit rating (risk)
- Market price
- There are several types of bonds: fixed rate, zero coupons, junk bonds, convertible bonds, and quite a few others.
6. Discuss other conventional investments. Now isn’t the time to teach your child about futures, options, swaps, and hedging strategies. Keep the information simple and easy to digest. However, there are other investments that can be suitable for discussion:
‣ Mutual funds
7. Discuss risk. An easy way to explain risk: The more risk an investor is willing to take, the more money they can potentially make – or lose. Investing can be as simple or complicated as you choose to make it.
Consider what your child is capable of understanding. If you confuse your child, his enthusiasm will quickly disappear. Teach the most relevant topics first and maintain your child’s interest.
You can also peruse your local library for books about investing for children.
‣ GETTING STARTED WITH INVESTING TOGETHER
That’s enough theory! Every child favors the practical over the theoretical. It’s time to invest!
There are several action steps to get the beginning investor started:
1. Start with a simple savings account. Whether your child is 7 or 17, a savings account is a great first step. It’s a safe place to store money in the short-term. However, the return isn’t great on a savings account. That’s the first lesson of investing – put your money to work in the proper place. That proper place will rarely be a savings account.
2. Let your child help with your own research. An older child can enjoy helping you analyze and choose investments.
‣ A younger child can enjoy helping you research the manufacturer of his favorite toy or candy bar.
‣ Younger children also enjoy tracking market indices. Ask your child about the current Nasdaq or Dow. Your children might know how to use the internet better than you do! Make a game of it.
3. Pick an investment together. An older child can have more autonomy than a younger child can. Choose a conservative investment and ensure your child understands why the investment was chosen.
‣ The ideal investment for teaching purposes is a stock. An individual stock is a much more interesting investment to a child than an index fund or a bond.
4. Track it together. At least once a week, sit down together and see how your investment is doing. If you purchased an interest-bearing investment, calculate how much interest has been earned so far.
There are also many investing games and online simulations that do a wonderful job of teaching investment basics. This can be a great way for your child to create and manage their own portfolio without putting any money at risk.