Teach Them to Save First
Before they can learn about investing, they need to learn about saving money. After all, you need money to invest. Buy them a piggy bank to get them started. Give them a small allowance to start, and if they want more money, make them do some extra work around the house to earn it. It’s important to teach them to save first and spend what’s left over. Teaching them about donating some of what they earn is also a good lesson. Make sure they understand they aren’t saving just for the heck of it; teach them that you save for a financial goal. A toy they saw at the store that they really want, but don’t have enough money to buy is usually a good example.
Use Relatable Examples to Teach Investing
A great way to teach them about investing is to start a garden. Have them help you set up the fencing, the laying of the dirt, and the planting of the seeds. During, explain that you are investing the time and energy now so you can get the vegetables and other plants as a return later. Once you pick the plants, it will help drive home the idea that in order to get something you want, you have to invest time, money, and energy first.
Another great example is Monopoly. Depending on how competitive your family is, this game could end ugly. Nevertheless, Monopoly is a great tool to teach your child about using the money to invest in assets in order to better their chances of earning a return.
Teach Them About Diversification
Diversification can be taught using a restaurant as an example. Have your child open a restaurant that only sells hotdogs, for instance. They could make good money doing this because most people like hotdogs. Now tell them that some of the hotdogs were tainted and people got sick. Now they aren’t getting any customers because of this. If they sold other food, like burgers or brats, they could sell those instead and still make money. Investing a little money in each asset is better than investing a lot of money in one.
Teach Them About Compound Interest
Teaching your child about compound interest is important. Compound interest is one of the most effective ways to building wealth and needs to be stressed on the youth. It is also important to tell them that the earlier they start, the longer their money has to compound, thus the more their wealth will grow. Opening a savings or money market account is a simple, yet effective way to get that point across. Unfortunately, interest rates are ridiculously low so it may take a few extra dollars to earn a penny or two of interest. Once they see their initial deposit increase by a few cents every month or quarter, it should help them understand compound interest.
Teaching kids about money and investing is very important. As stated earlier, your kid’s educational system is not going to help them here, it is up to you, as the parent, to teach them. Knowing the value of money, how to use it effectively, and how to make it work for them are all important lessons to teach them. By guiding them early on, you are setting them up to become responsible, financially savvy individuals.
Photo: Anil Mohabir