Learning to invest is intimidating for many adults, so the idea of teaching kids about investing can be a source of stress for many families. Although you may understand the importance of teaching your children early, it can be difficult to figure out which steps to take. It’s essential to get started, though: According to a recent Bankrate survey, “four in 10 teenagers (41%) were not receiving any financial literacy education in school.” Additionally, “54% of teenagers… reported feeling unprepared to finance the life they hope to have in adulthood.”
Because financial literacy is usually left up to parents to provide, it’s important to consistently have those discussions with your children and help them understand the concepts of risk and reward, compound interest and feeling comfortable with the investing process.
Listen to this week’s episode of the rich & REGULAR podcast about investing for your child, and keep reading for some ways to help you start talking about the investing process as a family.
Start on the right foot
To help your kids get started on their investing journey, you or other family members can set up accounts that benefit them, either using a custodial brokerage account, 529 college savings plan, or, if they earn their own income, a custodial Roth individual retirement account to help them get a headstart on retirement.
Although these types of accounts can be an invaluable head start, you also want to make sure your kids understand their accounts, how they work and how allowing that money to grow can benefit them in the future. Start small by including your children in everyday discussions about money and consider the following:
Keep it age appropriate
Although you probably want to start including your children in conversations about money from an early age, it’s essential to keep it age-appropriate so they can understand and internalize the lessons you’re teaching without getting overwhelmed.
Start by helping them understand what a paycheck is and how you allocate your money for food, housing, savings and taxes. If you have money left over once your needs are met, you might decide to add extra to your savings, give some away to charity, or invest some of it to help your money work for you.
Help older kids understand how the investment money is moved into the brokerage account and then show them the breakdown of investments you have. If they ask questions you don’t know how to answer, use the opportunity to look up the answer together or ask your financial planner for clarification. Teach them where to find reputable information and how to think critically about what they read—an invaluable skill for all areas of life, not just financial literacy.
Include children in financial conversations
If you and your partner have standing money check-ins, invite your kids for part of the discussion. Although you want to keep it age-appropriate, including them in a conversation can help normalize money discussions and get them thinking about managing money daily.
Spend time discussing your family financial values and let your kids help decide where some of the household finances are allocated. If you plan to make a charitable donation, give your children input on which organization to support.
Discuss some big purchases you want to make as a family and how you’re budgeting for them. Be sure to ask them about any financial goals they have and help them develop a plan to reach them. When kids understand how to work toward a big purchase, it can serve them well into adulthood and give them a financial advantage in the future.
Teach them that investing isn’t a get-rich-quick scheme
Children need to understand that investing has a purpose and is not a way to get rich quickly. Help them see the value of consistently investing in lower return, but usually safer, index or mutual funds. Consistency is more important than trying to time the market or pick the next hot stock.
Explain that it’s important to have a plan for every dollar and that investing gives you options later in life. Establish a system for saving, spending, and giving using pre-marked envelopes, jars, or a spreadsheet that they get to fill in with their allowance and birthday money, and discuss their options for each category.
Help them open an savings or investment account
When your child’s savings envelope or jar reaches a predetermined amount, help them open a savings account at the local bank. If your child is older, discuss the benefits of interest and its effect on their financial goals, especially for things such as saving for college or a car. If appropriate, help them open an investment account in their name that you can manage together.
Although the idea of compound interest might be challenging for a young child to grasp, explain that their savings will go to work for them because it allows the bank to borrow their money and will earn them interest in return. Then, if they’re ready, extend that idea to the stock market and how you can potentially make even more by investing, although you have to be careful about what you invest in.
Be sure to talk about how investing in the stock market comes with additional risks and that there is no guarantee of getting a return on their investments. This is also an excellent time to discuss risk versus reward and relate it to a concept they understand, such as calculating moves on a board game or thinking about the most effective play in sports.
You may think your kids are too young to start talking about investing or you may want to shelter them from the realities of the world for as long as possible. Although those ideas can be hard to shake off, it’s crucial to include your child (appropriately) in the family finances and give them an understanding of how money works well before they reach adulthood.
Use any accounts you or a family member have set up in their name as a springboard, and start talking about everything you wished someone had shared with you. Instead of having one extensive conversation that frustrates both of you, work out ways to incorporate financial discussions and small lessons into your daily lives.
The earlier you help your kids understand finances and investing, the more likely they will develop positive habits and competency with money.