As an adult, financial advisors and those that have gone before you have no doubt emphasized the importance of investing your money. After all, in terms of your financial goals, your children’s, and your future, sufficiently putting your income towards investments can equate to an all-around better future.
Of course, as any financially-aware individual knows, the sooner you can start investing, the better. This is because the longer your money sits, the longer it has to grow. The majority of people don’t learn about or begin investing until their in the twenties and have their first real-world job.
While that’s perfectly fine, wouldn’t it be great if you could get started even earlier? Well your kids can, and you can work to help them wisely save their money for the future.
Talk Openly and Consistently About Investing
Setting an investing foundation under your kids starts with explaining to them what this investing thing is all about. Don’t limit this to a one-time conversation. Keep the door open for future chats about money in general. When the stock market is in the news, talk about how that affects your holdings. Ask your children for their thoughts to help them start thinking critically about how investing works.
Skip the jargon and go for the big picture. Outline basic terms like “stocks,” “bonds,” “returns” and “portfolio” to give your child a broad view of how investing works. The more you can make it relevant to their life, the more engaged they’ll be, so don’t shy away from explaining how investing generates money to pay for things like their soccer team or the house you live in.
Teach Them the Basics, Then Build
The first step towards getting your kids investing is to simply teach them a little about it. Of course the younger they are, the simpler you’ll want to start.
Begin by teaching them the difference between saving and investing and speak in a language they can understand. Explain why it’s important not to put all your “eggs” in one basket, aka diversification. Break down other concepts in a language your kids can understand.
For example, convey to your kids that investing is merely a way of creating more money or that a stock is really just a small portion of a company. In other words, the best way to get started is by simply talking through the concepts with your kids.
Keep It Real
How did those kids from Fargo beat the market so soundly? Maybe it had to do with the fact that they took a page from Warren Buffett’s book and picked companies that they knew — like Netflix and Under Armour.
A great way to keep your kids excited about investing is to keep relating it to their lives. When they’re 8 or 10 and you’re just beginning to talk about money and investing as a concrete topic, use toy companies like Hasbro and Mattel to explain the basics of it all to them.
When they’re teenagers, you might switch your examples to film companies that are creating the movies they go see with their friends or Netflix (the couch-potato teenager’s best friend) or their favorite hangouts, such as Dunkin’ Donuts or Starbucks.
You can help your kids purchase shares of many of these popular companies through Stockpile. Stockpile is a broker with a really cool concept: It allows you to purchase stocks or fractional shares through gift cards. The company was actually founded by a guy who wanted to buy stocks for his nieces and nephews at Christmas but couldn’t figure out a good way to do it. Now you can choose from hundreds of household-name companies like McDonald’s and Amazon. It’s a great idea to get kids interested in investing.
Keeping Your Child’s Attention
Show your child what stocks you own. Interesting companies might get their attention — plane manufacturers like Boeing, sports gear specialists like Nike, technology companies like Apple — look at the company’s investor relations page with your child to learn how much they earned, what they make and how many people work for them. Then ask your child what company he or she would like to buy. Kids have favorites even if they are not aware of them. For example, Facebook and Disney are popular with most children.
Once you have introduced your kids to basic concepts, sit down and let them select a company. If you have the money, buy the stock and look at it at least once a week to show how investments can rise or fall. If you don’t have the money, make an model online portfolio and track stocks for fun.
Letting Children Invest
When your child is older, you can provide a more in-depth explanation of stocks and other investments. Eventually, you want to let your children buy their own stocks. Your child may have enough cash diligently saved up in a savings account by the time he or she is interested in investing. Don’t put it all into a bond or the stock market, but invest a third in each and keep a third in savings. This will allow your child to compare the returns of different types of investments.
You have two options if your child doesn’t have money to participate in the learning process. You can use your own cash to open a small brokerage account for your child to make investments or build a model portfolio of stocks that your child wants to buy someday. In the latter case, you will need to find innovative ways to maintain their interest.
Allow your child to make real decisions and take real risks. Money may be lost but the purpose of the exercise is to familiarize them with investing and part of this process is learning that investments have advantages and disadvantages. Whatever the outcome, the experience of gaining and losing money will be valuable.
Encourage Your Children To Be Involved
The phrase “skin in the game” holds true here.
Your children would naturally feel more committed and involved in the investments made if you allow them to use their own savings to make investments for themselves, rather than providing them with the money to invest.
This follows the same principle behind getting them to save up their own allowance in order to buy something they want, rather than buying it for them.
The Bottom Line
Investing can seem like an overly complicated subject, which is why it can be difficult to know just when to start with your kids on the investment path. Nonetheless, you don’t have to jump to real investing right away. By starting your kids early, you can begin by breaking down the basics and getting kids acquainted with investment concepts and ideas and building on their knowledge from there.