Teaching kids about investing can be simple. Show them the basics so they can make wise money choices!
Start saving money young, invest it well, and be patient.
This is the basic investing message that you need to teach your kids.
Many adults don’t know much about investing and as a result, feel unprepared to teach their own kids about it.
As a young adult, I remember feeling anxious (and overwhelmed) when thinking about investing and managing money because I didn’t learn about these things as a kid and teen.
But, even if you feel that you don’t know what to do yourself, you CAN raise your kids to manage money well and learn the basics about investing so they can be better prepared than you (at least that is MY goal for my kids!).
First, remember that you don’t explain any money lesson or concept to them one time and then forget about it.
Teach a concept and repeat, repeat, repeat!
Get them involved!
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So, how do you explain investing to a child?
Basic Steps to Investing for Kids
1. Start with Saving
Pay yourself first.
The first (and perhaps most important lesson) is about saving money because you can’t invest what you don’t have.
A financial planning survey estimates that almost 50% of Americans are living paycheck to paycheck.
Teach your kids to pay themselves first and make that a part of their budget.
The biggest path to financial security is being able to spend less than you earn, save money, and be patient.
The most important lesson for your kids: Start saving early!
This one thing is the key to having more money in retirement. The longer you wait to save and invest, the less you will have in retirement. Check out these charts to see and explain this concept to your kids.
2. Teach the Basics
After you teach them to save money, make sure your kids understand these basic investing terms.
Basic Financial Terms Kids Should Know:
Compound interest – First, you make a deposit, and then at the end of the year, you’ve earned money (in interest) on that deposit. Then, at the end of the next year, you earn money in interest on your original deposit plus the interest from the first year. This is the power of compound interest.
This is where it becomes important that you start saving early in life, so that compound interest increases as you get older. Check out the third chart on this page for a great visual example.
When you help your kids open a bank account, talk with them about the interest rate (usually very low) and what they can earn each year based on the original deposit plus interest.
Since the average savings account at a bank typically has a very low interest rate, people who invest wise and well, use bonds and stocks.
Bonds – Money loaned (from you) to the government (or a business) that will be paid back with interest after a specific time. The length of the bond can be short or long. US government bonds are usually the least risky.
Stocks – When you buy stock in a company, you basically own a small piece of that company. You share in the wins (and losses) of that company. The price of the stock can increase or decrease depending on how successful the company is (or not).
Risk and Reward – The more you risk usually means higher rewards (but there also could be greater losses).
Diversification – People who invest aim to reduce risk by selecting many different investments instead of choosing just one stock. (In other words: “Don’t put all your eggs in one basket”.)
Keep showing them compound interest charts and emphasizing the importance of starting your saving and investing path early.
Mutual Fund – A mutual fund takes the money from many investors and invests it in a wide portfolio (stocks, bonds, etc.). This is a great way to diversify.
Index Fund – A mutual fund that matches the structure of a stock market index (for example, the S&P 500).
3. Show Them how (and Why) to Start Early
Make sure your kids understand the basics of these charts and the concept of compound interest.
Show them how to open an account and get them started early.
Two things to remember:
- Talk about and emphasize diversification.
- Don’t pick stocks.
Common advice is to have your kids pick a stock for a company (like Lego or Disney) and invest money and watch the stock regularly.
However, experts don’t recommend cherry-picking stocks, but rather choosing a solid mutual fund or index fund and buying regularly (and waiting patiently through market fluctuations with a long-term vision).
Start your kids off with:
- a savings account
- a checking account
- a budget
- a Roth IRA (they can open this when they start working)
When they have these basic concepts down, make sure to cover investing.
4. Emphasize the Importance of Long-Term Growth (and Patience!)
Go back and visit these charts again.
Helping kids understand compound interest is hard, because it’s often difficult for kids to wait.
You can start by having them save money toward a goal. Wait and watch it grow.
Keep it as simple as possible.
Personally, I spent too much of my young adult life feeling afraid of making financial mistakes (particularly with investing) so I avoided money matters for too long.
If you want a better understanding of investing so you can explain it in more detail to your kids, check out these 2 great (easy to read) books:
These 2 books explain the basics of investing and offers tips for getting started if you feel unprepared.
The first book helped me feel more confident in making good investing choices and can give you additional tools for explaining investing to your kids.
Read it, digest it, and explain the basic concepts to your kids.
I know many adults who are overwhelmed or feel unqualified to make investment decisions so they don’t.
If you feel overwhelmed at teaching your kids about money, start with the very basics and learn yourself.
- Paying off all debt
- Saving an emergency fund for your family
- Starting a retirement account (I prefer a Roth IRA)
- Opening an investment account
It can feel overwhelming to try and teach your kids about investing (especially if you feel you don’t know enough about it yourself), but you can start with these simple basic tips and revisit this lesson again and again. Investing for kids doesn’t have to be difficult or complicated. Focus on teaching them to start early, save money, understand the basic terms, and wait patiently.
What are some things you wish you had learned about investing? What do you want your kids to know?