When it comes to investing, time is your biggest ally. The more time you give your investment to grow, the more likely your nest will become.
The trouble is that most people do not learn the concept of investing until the first 401 (k). And by that point, you’ve already wasted a decade or more.
Just imagine how much more affluent you would have been if you had invested only when you got your first job after school as a teenager, instead of waiting for adulthood.
In a recent survey by financial services company DA Davidson, one-third of respondents said children should start learning about financial literacy with 10 years or less. Yet less than half of U.S. states require high school students to attend personal finance classes.
Children learn to add, subtract, multiply and divide, but where are the lessons the importance of saving and investing?
Traditional education systems do not usually teach children to invest: why young people should buy stocks and how to create a diverse portfolio to spend them until retirement. So it is up to parents to set their children up for financial success. Fortunately, financial literacy is easy to transfer from home.
To that end, here are seven steps you can take to teach kids how to invest.
Involve children in financial conversations
If you want your child to invest their money comfortably, they should be comfortable with the concept of money first.
“Don’t avoid talking about money just because your kids are young,” says Aditi Javeri Gokhale, chief commercial officer and president of investment products and services at Northwestern Mutual. “Even the occasional conversation at the dinner table can be extremely important to help children understand major topics like what it takes to make money, have a budget, pay bills, and be able to choose about the things they buy.”
Zuzana K. Brochu, vice president of financial planning strategy at People’s United Advisors, suggests that parents start teaching investing to children by explaining how cash flow works. For example, you get a salary, and part of the money goes to taxes and part to savings, and then you pay the bills and buy the goods needed for everyday life like groceries. If you have money left over, you can save more, donate to charity, or flaunt a fun item.
“You don’t have to share real numbers, but make sure you share financial concepts, and especially your values around money,” Brochu says. “If you have negative patterns around money, this is a good opportunity to cure them not only for your benefit, but for your child as well.”
Teach children that investing is not a quick enrichment scheme
Children also need to understand the purpose of investing – and not to get rich quick.
“It’s important for children to understand that money is a tool that helps them achieve their goals and dreams, which is a completely different way of thinking than picking hot stocks in the hope that they will get rich quick,” says Gokhale.
He tells parents to start teaching children about investing by pointing out the importance of constant time savings so you have money when you need it.
“When it comes to investing, talk about it as a long-term perspective, not how you can make money quickly in the market,” she says. “Above all, make sure children see how important it is for their money to have a plan that connects what they want in life – not just a way to live the rich way of life they see in movies, on television and many other places.”
Help children start investing with a financial goal
To help children understand the importance of a financial plan, have them set goals for their investments. Just as a financial advisor guides their clients through defining quantified financial goals based on what is important to them, parents can help their children define and quantify their own financial goals.
Talk to your kids about what they’d like to save for in the future, whether it’s a new toy or a trip to Legoland, says Tammy McKennon, Edward Jones ’financial advisor. Allow them to choose what is exciting and important to them, and then encourage them to save so you can work together on that goal.
This is also a great way to teach your child about delayed gratification, which is an important lesson for understanding any investor.
Karen Baer, a senior wealth advisor at The Colony Group, says parents can help children develop responsible financial habits by establishing a system of spending, saving and giving. “This could be as simple as three envelopes with a category inscription on each envelope,” she says. “When your child receives the money, help him decide how much to put in each envelope.”
As the savings envelope grows, you can think about how opening a savings account or investing that money would help it grow faster.
Explain the power of combining with illustrative examples
The power of folding at the heart is the way investors can make money, but this is a difficult concept that can be explained to young children.
Amy Szostak, director of family education and management at Northern Trust Wealth Management, suggests using illustrative examples, such as practicing doubling pennies when teaching children how to invest.
“Ask your child if they think a penny is a lot of money,” she says. What if that penny doubles every day for a month? “They might be surprised to learn that linden can grow to over $ 10 million if it doubles every day for 31 days,” she says.
You could then extend this lesson with an actual bank account. “Once your child’s envelope has received several deposits, open a savings account with interest,” Baer says. You can review the statements each month to show how your child’s interest earns interest.
Then link this to investing for kids by explaining that money in the bank earns interest because you lend it to the bank. There is almost no risk because the money is provided by the Federal Federal Insurance Corp. (FDIC), but also very little return. Your child can raise money faster by investing in the stock market, but that comes with the added risk.
You can use your child’s timeline for her financial goal to determine which investments would work best. If he is saving for a new bike he wants in the next year, maybe a certificate of placement (CD) or bond fund it would be best. But if he expands his goal to five or 10 years in the future, he can consider it equity funds for more aggressive growth.
Stimulate their interest in companies they know
The maxim “buy what you know” that has been talked about in investment circles for decades. The idea is to put money in companies that you understand and that is crucial when teaching children how to invest.
“This is important for everyone when it comes to investing,” says Jeff Mills, chief investment officer at Bryn Mawr Trust Wealth Management. “But in terms of teaching kids, if they understand what a business does, if they use a product, they can better understand why stock prices can rise or fall.”
Children today have two things as future investors, says Szostak: They are aware of product branding and are skilled network researchers. “Ask your child from which company he is interested in and invite him to spend 30 minutes researching the stock price with you,” she says.
Compare its price today with the one that was valid a year ago or 10 years ago. Was it volatile? How would your child feel about owning a stock if the price dropped?
“To go a step further, look up the dividend history and explain that for each share in their possession they receive a declared dividend amount,” Baer says. “Depending on your child’s age, you can even talk more deeply about reinvesting the dividend to continue saving and growing assets.”
Investing in what you know can also help your child become a long-term investor: “If you know the company and understand what drives its business, you’re more likely to endure periods of instability,” Mills says.
Experience first-hand investment in virtual exchanges
It is important not to overlook the risks inherent in investing. Shares are not just increasing.
Virtual exchanges can be a fun way to give your child a more practical investment experience without the real risk of losing money, says Bill Engel, a certified financial planner and senior vice president of Fort Pitt Capital Group. It directs parents to popular simulators like Investopedia Stock Simulator, Wall Street Survivor and HowTheMarketWorks.
These simulators can also help you teach your children important lessons about what to invest well. “Just because you like a product or it’s popular doesn’t mean it’s a good stock,” says Engel. Likewise, “market time is more important than determining market time.”
While there is a risk that virtual trading can “facilitate” investing, Engel says by emphasizing these teaching moments, children will be less likely to be attracted to the “game” of the market as they get older.
Open an actual investment account
Once you and your child are ready, you can open a real intermediary account for the child. If she made money, you could open her to the Roth IRA. Explain that it is for retirement and why it is important to start early by showing the time value of money, Brochu says.
Show her how much $ 100 invested in an IRA can grow now and how much it will be in retirement, she says. For example, $ 100 invested at age 18 can rise to more than $ 3,000 up to her retirement age at a rate of return of 7%. What’s more: If he puts in $ 100 every month from now until retirement, he’ll have over $ 500,000 at a 7% return rate.
You can teach investing to children by showing them how the investments they choose can affect that long-term rate of return. For example, the average long-term return on stocks is about 7% to 8% after inflation compared to close to 5% for bonds. But stocks also have higher risk and instability.
Since your child, I hope, has a few decades before he will need the money, he can invest his retirement savings in stocks and enjoy the tax-free growth that the Roth IRA provides if he is willing to wait for the decline.