How to help your kids understand investing
Teaching your kids about finances from a young age can help them build a healthy relationship with money and give them a head start on saving and establishing wealth. Time also plays a huge role in investing since the longer you invest, the more earning potential you have. This teaches the value of patience and demonstrates how having long-term saving goals early on will make saving for large purchases a more natural habit in the future.
Conversations around saving and investing can ultimately better prepare your kids for financial success and be better equipped to handle their own money challenges. Here are some helpful tips to talk with you school-aged children about investing.
Start with the basics
When talking with your kid about investing, keep it simple and try not to overcomplicate with confusing terms. Explain that investing is essentially using money to make more money. Introduce the differences between a savings account, which stores money, and investing, which uses money for risks and rewards. Then introduce different types of investments like stocks and bonds. When you buy a stock, you are purchasing a piece of a company that fluctuates based on how the company is doing. When you purchase a bond, you are essentially loaning money to a company or government which is required to pay back in increments over time, based on specified interest rates. Bonds are lower risk since the return is small and mature over a certain period of time. Stocks tend to have a higher risk, which can mean high reward or high loss.
Explain with pictures
Pictures and graphs can often explain the risks of investing better than words. Show your children a graph of the S&P 500 Index and explain that the index tracks 500 at group of publicly traded companies and shows periods of decline and growth. Then you can discuss not only how risky investing can be but also how the investment could pay off in the long run. You can also segue into a discussion about diversifying your investments. Try to show your children a company they would know and be interested in like Disney or Google. Then follow that company over a set period of time. You can teach your kids that the company’s stock usually follows how well the company is doing. This also points out why investing in several different companies and industries is so important because if one company does poorly, the rest can hold up your investment if they perform better.
Make money talk with your kids a habit
Talking about finances with your children will make them more comfortable with money.
Try to include your kids in family meetings on budgeting, spending and investment strategies. Every time your child gets money, encourage them to save, spend, invest and give. This will lay a healthy foundational relationship with money and help your kid understand how to manage money. It’s also important to talk about investing as a long-term game. The ‘buy and hold’ approach to investing, meaning buying stock and bonds, and holding for several years to see how they do, instead of focusing on the short-term returns.
Another tip might be to check with their school to see if economics curriculum is taught. Usually, this shows up for elementary kids as a “market day” or a unit on starting a company.
Investing, like anything else, is a skill that takes time to master. Be sure to start with small amounts of money to make room for mistakes and to grow from those learnings. It’s important that parents make investing fun so that their child enjoys the learning, and this knowledge continues to grow as they get older.
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