Every parent wishes for a financially secure future for their children. And that future is only possible through a better understanding of healthy financial practices. In the world of personal finance, the more aware you are, the more you can use it to plan and be successful. An essential skill that can help is learning about the stock market and understanding how to grow money through investing. Investing beyond a savings account is a habit worth encouraging and nurturing. For parents especially, it can be beneficial to begin teaching these lessons to kids at an early age and revisiting these principles often.
Create a Conversation
When it comes to money, many parents avoid having conversations with their kids for various reasons. Some may feel it isn’t the right time or their kids are too young, and others might think that since they themselves don’t have it all figured out, they wouldn’t know where to start. The truth is, teaching kids about investing is very similar to teaching them any other skill. It all begins with simple conversations.
Investing for Young Kids
When it comes to investing for kids, depending on the age of the child, the conversations will vary. For example—for younger kids, it could be as simple as explaining that investing is a way to make money grow. Just like you plant seeds and grow flowers, investing is planting seeds to grow money. Parents can ask their kids: why would you like to grow more money? What would you do with it?
Investing for Middle School-Aged Kids
For middle school-aged kids, parents can begin by explaining that investing is like buying a little piece of different companies. Parents can create better engagement by pulling examples from their child’s life to explain this idea. Suppose their children enjoy eating at a specific restaurant or playing particular video games. In that case, parents can explain that investing would be buying a piece of that particular company, with the hope that the value would go up over time.
Investing for Teens
For high school kids with a summer job or those who work after school, discuss the freedom that investing can create in the future. Just like they earn money through working, investments can make money and allow them to stop working someday and eventually retire. This can also be an excellent time to introduce the idea of trade-offs between risk and reward, where higher risks often lead to higher rewards, and lower risks typically mean lower rewards. For teens and younger kids with long investing time horizons, higher-risk investments can often be a great choice. Learn more about how to teach teens about money.
It’s important to remember that every kid will respond differently to these conversations. For a parent, it’s essential to tailor the conversation to their child’s age and interests to create meaningful and engaging conversations.
Show Them How It’s Done
One of the best ways to teach children is by modeling the desired skill or behavior. Kids constantly look to their parents to understand the world. Similar to creating a conversation, it’s important to tailor it to the child's age and interests.
For example, younger kids may benefit from seeing their parents deposit money that will be invested. It can be powerful for a child to see money come in and then see how part of the money is set aside to be invested and grown.
For kids that are a little older, it can be helpful to view some investments their parents have made. Parents can show their kids the various ways they invest, such as through an employer 401(k) or separately in an IRA. Try showing your kids how to set up automatic payroll contributions. It could also be valuable to talk through the actual investments inside the accounts and how these investments have performed over time.
The biggest thing to remember is that you don’t have to have it all figured out before talking to your kids. Helping children understand that their parents are also learning can make the journey even more relatable, fun and exciting. The key is for parents to begin planting these seeds for their kids so when they start investing, it feels like a comfortable experience.
Let Them Try
Now for the fun part! A great way to get kids excited about investing is to let them try it out.
For younger kids, this may be as simple as “investing” some of their allowance by giving it to their parents, who can give them a set “interest rate” of growth over time. The rate can be whatever the parents decide and is a great way to show kids how money grows over time.
As kids get older, parents can set them up with investment accounts opened in the child’s name but managed with the parent’s help. This can be an excellent way to let kids try their hand at investing and give them the ability to pick specific investments and view the growth over time.
Understand Best Practices
Like many things in life, investing has a wide variety of approaches that can lead to many different outcomes. There is no one size fits all approach, but here are some critical concepts that parents can teach their kids:
The Power of Compounding and The Rule of 72
Kids have time on their side, and more time means more compounding. Time is one of the most powerful forces in investing and can be demonstrated with The Rule of 72. The Rule of 72 states that if you divide 72 by the annual growth of your investments each year, the result is how long it will take for the investments to double. Example: If Ruth earns 10% on her investments each year, then it will take 7.2 years for her money to double. (72 / 10 = 7.2) After another 7.2 years, the money will double again—which is the power of compounding!
It Pays to Diversify
A commonly accepted practice in investing is to avoid putting all of your eggs in one basket. Explaining to kids the value of holding many different investments like stocks and bonds across a wide range of companies can help them achieve investing success in the future. Learn more about how to create a successful investment portfolio.
Investing For the Long Term
The core of this idea is that investors who are in it for the long haul often have a much greater chance of growing their money than those attempting to make money quickly.
In the end, getting started is often the most challenging part, but it’s important to understand that the best investment plan for your child’s future is helping them gain these crucial skills. At Teachers, our goal is to help you meet yours, and we’re here for you every step of the way on your financial journey. If you’re interested in setting your children up to be financially savvy, please reach out for a conversation around successful investing. Parents can find more information and contact a member of our Teachers Trust and Financial ServicesTeam at https://www.teachersfcu.org/personal-banking/trust-financial.