Teaching your children about money and investing is one of the best ways to help them prepare for a solid financial future. Parents don’t always know how to communicate with their kids about investing, so it can be difficult to find the best way to educate them. In this article I’ll share a few pointers about introducing your children to investing and spurring their interest in good financial practices.
If your child is very young, get them started with saving first. Saving is the first step towards investing, and ingraining the habit of saving money early on will put your child on the right track to financial freedom later in life. Different routines work for different families, but I encourage you to teach your children to save a pre-determined percentage of their gift money, allowance, or any other money they receive. The amount they save should be significant enough to be a little bit uncomfortable, but not so much that it becomes a punishment.
When your child has saved enough money, it’s easy to open up a brokerage account for them to start investing and purchasing mutual funds. Open the account with your child and talk to her about how investing can help her money grow much more than just putting it in the piggy bank. This is an important distinction: saving is about keeping a certain amount of capital while investing is about long-term growth. This could be illustrated by talking to your child about his or her own short term and longer term goals. While putting aside cash might be enough for that new video game, investing is a better way of achieving big goals, such as buying a car, condo, or a house.
While there’s a lot to discuss, the key to talking about investing with kids is to keep it simple, make it real, and give them ownership. Sometimes incentives can help. For example, you could make a deal with your child that you’ll contribute a percentage of whatever amount he or she puts into an investment account. I also recommend making a spreadsheet of deposits, so your child can compare them to the account balance later on. This can be discouraging in down markets, however it brings home the importance of diversification and frank discussions about risk. It’s nice to own an individual stock, especially a childhood favorite like Disney, but mutual funds help spread risk and make it possible to own shares of many favorite companies, instead of just one or two shares total. Try to find mutual funds that offer stocks your child likes, whether it’s Google, Apple, Ford, or Mattel. Get them thinking about the industries they like and use and asking questions about why they like a certain company. These habits can help keep them interested in the investing process and become better investors over time.
During the teenage years, you can also introduce your child to the data that show the importance of saving and investing. While retirement is a mythical concept to most kids, the difference between $1 million and $500,000 is not. Tables such as this one, which show the ending account balances of savings account after 40 years, show the lifelong benefits of beginning a savings plan early and sticking with it. Most kids are not concerned with budgeting or the future, but this kind of image can show them how powerful the results can be!
Further, talk to your child about opening up an IRA account or a 401(k) account through their job, and discuss the basics of retirement savings – while your child might not want or need this information now, it will make life easier once he or she enters the workforce and begins to hear about these concepts. Showing your child a summary table such as this one can drive home the point that putting aside just a slightly greater percentage of salary each year could have an enormous effect on their wealth later in life.
Of course, you may find that your child has little interest in investing, or perhaps is very risk-seeking or very conservative. This is great to know! The more your kids can learn about themselves and how they want to manage their money early in life, the better. I started having my children invest their own money when they were about 7-8 years old, and always sit down and talk to them about their account statements and what’s happening with their money. Today, my son Clay likes to invest his money whenever he can, while my daughter Abby prefers not to invest as much and keep some money in cash. I help my kids work with these preferences by teaching them how to manage money in a way that matches their personalities. Just remember that the end goal is to instill certain key priorities in their minds, such as the value of saving, the importance of goals, and the power of sticking with an investment plan. Even if your child is already well into the teenage years, don’t miss out on the opportunity to incorporate saving and investing into his or her life. These are lessons that could help provide financial security for a lifetime.
For information about managing your IRA or a 401(k) rollover, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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Very good article – I will use this for my kids when they grow up.