From experience, adults know that achieving financial independence can be a daunting task, which is why it’s never too early to start teaching kids about saving and investing.
Investing can be one of the best ways to build wealth over time. Even though investing at a young age can improve success down the road, only 6% of children have an investment account, according to a 2020 survey.
Unfortunately, investing isn’t something we’re taught in school. This leaves parents with the main responsibility of educating their kids on financial literacy. When you’re ready to talk to your kids about investing, here are some tips to guide you.
Involve Your Kids in Financial Conversations
If you want your kid to be comfortable investing their money, they first need to be comfortable with the concept of money. Casual dinner table conversations can be a great opportunity to help kids understand major topics like what it takes to earn money, to have a budget, to pay bills, and make choices about the things you purchase.
To get the conversation started, you can ask them for their views when making financial decisions concerning the family on the best ways to use money. This can be followed up with a casual conversation on the value of budgeting, saving, and investing money. Even if a child isn’t ready for facts and figures, he or she can understand the financial decisions you make and their impact.
Start With the Concept of Saving then Investing
Before you get into stocks, mutual funds, and index funds, your children need to simply understand that some money is for now, and some is for later on. That’s where the concept of saving comes in. The classic “give, save, spend” jars can work because they teach delayed gratification and teach it visually.
After your kid has mastered the basics of saving, you can slowly work your way up to conservative investments like a Certificate of Deposit (CD). If a kid puts $100 into a CD, and then receives $101 however many years later, she’ll start to understand that she earned more money by simply not touching her money.
Another way to take a fun route with teaching children how to invest is through real-life “gamification” of the stock market.
Children can play games that simulate driving a car and after a while, they want to learn how to drive a real car. The same principle can be applied to finance, creating more advanced digital games similar to Monopoly to achieve similar results.
Playing through online simulations can create a space for you and your child to openly discuss the rules of investing. There are online gaming tools that help children build a fundamental understanding of investing and that also work in conjunction with smartphone Apps.
Let Your Child Invest
Kids tend to learn by doing. Therefore, enabling them to invest will help them adopt the concept of investing faster. You may help your kids pick stocks of companies whose products and services they use.
Since children can’t open Individual Retirement Accounts (IRA’S) by themselves, parents can help them invest through a custodian IRA or a Roth IRA. The main goal of doing this is to persuade your child to leave the money in the investment account so that they can reap the benefits of compound interest. Here are some guidelines on how to introduce your kid to investing:
- Help them set a financial goal.
- Encourage them to invest money they don’t need in the short term.
- Teach them to start small and learn from their mistakes
- Encourage them to invest in something they care about.
- Make it a habit.
Create an Investment Portfolio
Creating an investment portfolio for your child can be an effective way to teach them about money management. Tracking a portfolio can easily open the door to a conversation about what it means when stocks rise and fall and some of the best assets to buy. It’s something kids can enjoy even at a young age. Mock portfolios are an easy intro and can be tied to your kid’s interest.
You can start off your older kids by giving them a play money portfolio and tracking the results.
If your goal is to build a nest egg for your young one, a conventional investment portfolio of stocks, bonds, and mutual or index funds may be what you are looking for. Financial consultants suggest building a child’s portfolio in the same way you would build an adult’s portfolio.
In summary, saving and investing are important to kids as well. Early investing can open doors to new opportunities and provide an economic safety net. It can also teach your kids vital skills such as financial literacy that help them make savvy investment decisions as adults.