Best ways to teach kids about investing
Today, when we have already survived multiple global economic recessions and have come to live in the era of formidable household debt load in almost every country, all decent parents ask themselves what they can do to create a financial safety net for the future of their children.
One of the answers that are plain to see is to teach your children how to invest and make money. Here, a lot is said about the importance of a personal example you show to your kids in the way you handle money, and it would be straightforwardly simple but for one point — most parents themselves have an extremely vague idea of how to invest.
Still, smart people have already taken care of all of us: there are approaches you can use to teach your offspring about investing, even if you are far from the world of finance.
How to teach a child to invest step by step
1. Most experts that delve deeply into teaching finance to minors do share the opinion that the earlier you begin, the better it is. Start with simple things. Give your pre-school kid a piggy bank and explain the value of saving some part of the money you have. Teach your primary school student about savings bank accounts and simple interest rate. Make an experiment — open a savings account, and watch the deposited amount grows as time goes by.
2. Now, start explaining the difference between just saving and investing and what makes people want to invest. The answers may be easier than you think. Go through this logical chain:
- people do invest because they hope to earn money this way;
- the most common way of investing is buying shares;
- shares are pieces of paper that companies sell to people to use their cash for running business;
Don’t refuse to illustrate it with clear examples. Choose any company whose products have some meaning or value for your child. This may be a film studio, a toy or clothes manufacturer, or a company that makes your favorite ice cream. Be persuasive. Invent a story, how a chosen company makes a great product everyone wants to buy, and this invites people to buy the company shares because they see the company is successful. And then the company’s shareholders earn some money.
Tell the opposite story, when no one wants to buy a new product, or when a new film turned out to be so boring that no one is going to watch it. In this case, the company fails, doesn’t make any money, and its shares go down. And its shareholders incur a loss.
3. There is another approach advised by the experts that can be termed as “pay yourself first”. It’s an exciting concept that can turn quite efficient on occasions. Teach your kid to allocate the amount for saving / investing in the first place. Otherwise, by the end of the month, there will be no cash left for this goal. If your kids strictly follow this rule (as an adult as well), the return on investment is just bound to happen since, as we all know, “time is money.”
There are two important points arising out of this concept: early start and compound interest rate. Explain to your kids what it makes for an interest rate to become compound and how it works. Show them the charts that can easily be found online to demonstrate that an early starter has more benefits from such a kind of investing than a person who has been thinking over all details for an extra dozen years.
4. Another factor contributing to the financial success of those, who are not going to become professional brokers, is index funds. They would save your kids hours searching for investment information online and, which is even more important, protect them from a high risk of losing their money.
So the most straightforward concept for successful investment since early years is made up of the clear idea of compound interest plus understanding that a complex investment product, such as an index fund, that generally follows the stock market pattern is safer than choosing shares on your own.
9 practical tips for teaching your child how to invest
There is also a package of recommendations for the parents wishing to make the investment teaching focus a part of their everyday life. For example:
- Stick to the learning style of your kids customizing the manner you deliver information to them depending on whether your children prefer adsorbing visual, video, audio data or to learn through the conversation and dialogue;
- Play the stock market. You can follow the simple idea of handing out some cash to kids and monitoring their “investment performance.” Today, you can find a lot of tabletop and online games that will make the task easier for you and more exciting for the younger ones.
- Make a bet on gamification. A fascinating road to investments is using true-life simulators of the stock market. Today you can find software products that deliver trading lessons through the friendly-user interface bearing a close resemblance to computer games;
- Apply a “10 Pack” idea: give the ten-stock portfolio to your kids, with some of the shares returning dividends. This approach introduces the return on investment concept and brings home to children an essential thought that not all of the best companies are supposed to be the best investments at the same time.
- Explain the “Rule of 72” to your children. This rule says that to calculate the speed with which your cash doubles, you have to divide 72 by the interest rate. In other words, if your percent per annum is 3%, it will take 24 years to double the amount (72 / 3 = 24).
- Remind your children that giving is an alternate side of receiving. Thus, the cash they receive as presents can also be used as the basis for investment, saving, and donating;
- Don’t refuse to employ cartoons, children books, or any other aids, whether specifically designed for investment teaching or just accidentally containing proper examples on the topic;
- Explain to teenagers how profitability calculators work simulating different investment scenarios. They enable to modify the variables, such as the amount to be invested every month, the number of years the investment will last, and the expected margin — a very useful exercise.
- For well-developed countries with a long-established financial system, parents can pass along the financial gifts that they received from their parents a while ago, like a dividend reinvestment plan, for example.
If your kids intend to seriously engage in investment operations, there is a whole new world opened for them today: online schools, tutorials from banks and stock exchanges, online courses from universities — they can choose what they prefer. These online classes will be far more detailed. There your children will learn about how to select the investment lines and an issuer of securities and how to develop successful investment strategies. They will have lessons on assets, liquidity, and volatility, risk/profitability ratios, principles of stock exchange operations, venture mechanisms, portfolio management, or hedging. Some of these online endeavors will even enable them to buy their first shares and bonds and open their brokerage accounts.
Of course, being moderate in your expectations is one of the proven keys to success. Don’t start any “home investment courses” with the mindset that your teenager will become another Warren Buffet just in a couple of years, right before he or she graduates from school. This route will certainly lead to disappointment and great pressure on your kid. But even though most children will never open doors of Wall Street offices, teaching them the basics of investment will definitely help them choose the right financial path. At least they will avoid financial problems and will know the easiest way to saving and investing. And in a best-case scenario, the whole world will hear about your financial genius.
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