How to Teach Your Kids About Investing
Did you know that schools do not teach basic financial lessons or provide tools for our children? Every person can use some simple skills to help with investing and managing money. Yet, it is not taught except in universities for those who major in the finance area.
The benefits of teaching kids about investing are immense. Financially successful parents teach their children far more often than other parents when it comes to managing and investing money. Studies have shown this is a key factor in the success of their children and future generations.
Should parents start by teaching about money in general before teaching about investing?
Yes, yes, yes! Many parents are not savvy about investing anyway but have at least some knowledge (the more, the better) about how to manage money. It has been found that even children 10 years of age can grasp simple money management concepts very well.
What are some ideas for helping kids get started with managing their money?
To teach kids about investing, they need to understand the purpose of investing – but let's call it savings for now. You know, the old "put that change in a piggy bank" so you can save up and get that 'X' you want. This helps kids understand that delayed success is good and has value. Reinforcing this behavior as kids grow is important. For example, setting up a small, joint savings account as they begin to earn money is a great start. It could be a college fund or saving for that first car, etc.
As time passes, you can reinforce the concepts and the future payoff as well. When the day comes to get that first car or other items, they learn the gratification that comes with saving and even investing.
What are some tips for explaining how investing works to the kids?
Start with simple examples that can be understood? This depends on the age and status of your child. The piggy bank example is a simple but great way to start. As children grow, you can build on this example by explaining what you are doing for the future, e.g., saving to get a new home as well as putting money into investments for the future (retirement).
One of the best things you can teach kids as they age is how compounding works. A simple example can show them how a series of small investments can become quite large over time. A graphical example is usually best as kids learn quickly with images vs. a bunch of numbers.
What are some tips for helping kids understand the risks of investing?
Think of this step as one for kids after high school. Most of us as parents have made some good investments and some bad ones. Teach your kids by telling them about your own mistakes and how you learned from them. Give them pointers on things to avoid as well as how to avoid scammers that are now prevalent everywhere.
You can even take a course together on basic investment principles. If you have knowledge of the stock market, IRAs, 401Ks, or other investment strategies, share these (one at a time, please) so they begin to understand the options available to them as well as the differences between them. Keep it as simple as possible. Complex theories and investment systems are hard to understand and not applicable to most people early in their lives.
No matter what, be honest, give them the best advice you can, and let them know that trusted advisors are key to any person’s investment success!