Many parents want to jumpstart their kid’s financial education, and one question that often appears is: How to teach investing for kids? Moreover, how do you explain the concept to a child in the first place? And lastly, does it make sense to start investing on behalf of your child?
Investing is not the first lesson you should teach if you want to raise a financially responsible child. However, parents should not avoid it, as is often the case. You don’t want your children to grow up and spend more than they earn. But, you shouldn’t jump to investing lessons if they don’t know the basics of money management in the first place. Teaching is a continuous process through games, talk, and real-life examples.
In addition to teaching them how to be financially literate, it keeps them engaged with you and can help them become economically independent as they grow up. So, let’s discuss some of the best ways to present essential lessons such as finances to a kid.
The Simplest Ways to Teach Kids about Investing
You might have already started teaching kids about money management and financial literacy—the basics of saving, spending, budgeting, and sharing. Suppose not. It’s never too late to start because these lessons preceded teaching kids about investing.
Teaching children about investments can be tricky. Investing for kids is a hot topic lately, and parents want to give youngsters a jumpstart in life. But, to use them, they must understand what this is all about. Of course, you want them to understand the value of their money and how it works, but you also don’t want to scare them into thinking they’ll lose all of their savings if they get too excited about it.
How to Teach Kids About Investing Through Conversations
Sure, there are many things you want to tell them and explain, but it’s always good to put one foot in front of another and go slow. These introductory talks include the relationship between risk and reward. That means understanding things such as:
- how to consider companies as investments
- how the stock exchange works
- what risks do you take by investing
If that is too much for you, fortunately, you can use a few different methods to teach kids about investing their money. Here are some of our favorites:
#1. Show them how much money they have—for illustration, shopping for groceries, and discussing items on sale vs. the regular price tags. You can set up a shop in your house, selling items like toys or empty boxes of products. Please give them a list of things they need and a specific amount of money. It is an excellent way to give them real-life insight that everything is worth something. If you open a savings account or have a piggy bank, show them their bank balance, they can see how much money they have in their accounts and compare it to real-life expenses.
#2. Talk about what could happen if they didn’t save money for the future. For example, suppose they don’t save enough money for college or university. In that case, they might not be able to enter because there won’t be enough money left over after paying all other expenses. Include the talk of daily living expenses such as rent and groceries. This teaches them how important saving money is and the importance of planning and thinking things through before acting on impulse. We all know that sometimes it can lead to people spending money in ways they regret later on.
#3. Have a conversation about how you’ve made mistakes in life and learned from them. This can be a constructive way for kids to understand that it’s okay to make mistakes because everyone does, but the important thing is learning from them and not making the same ones again. Moreover, you can give your actual situation as an example, like the time you overspent on your credit card and how that debt is bad for anyone. The best lesson is the consequence of the experience. This, in turn, gives them something to think about, that not every decision is the right one.
#5. Don’t be afraid to start the talk about stocks and bonds. Primarily you want to explain the difference between the two. Stock can be a tiny fraction of ownership in the company, and it’s a great way to explain it to them. But present in such a way they understand. They are more likely to be interested if they know the company you are talking about. So, for example, Disney would be the number one choice of any child.
You can oversimplify things by explaining that if the company does well, the value of its stock will rise, which means more money for them. Now, a bond is a bit different concept. It is like an agreement, you borrow money from this company, and in return, it will eventually pay you back.
The Art of Teaching Investing for Kids in the 21st Century
If you look back to your childhood memories, every generation had its way of teaching money management to kids. Some were through toys, some via actual examples, and of course, ages-old piggy banks. However, kids nowadays are more technologically adept than we ever were. Hence, their world revolves around gadgets and games. So, why not use them in your favor to teach your kids to invest?
It’s never too early to start teaching your kids about money. At some point, every parent in their childhood played make-believe games with cash. The one well-known way was a piggy bank. It’s the base and foundation of all future lessons. However, they advanced today from a cute two-legged character to practically a strategic plan for the future.
There are still kids out there who like to read. It doesn’t matter if it’s a paper or a digital book. They can be great resources to assist you in your lessons. For instance, some kids learn the best through stories, and many adults. So, choose titles that cover your topic and are age-appropriate for your child, for example:
Investing for Kids: How to Save, Invest and Grow Money by Dylin Redling and Allison Tom
The book is intended for children between the ages of eight and twelve. Through real examples and practical advice, the authors attempt to teach your child how to earn money, start a savings plan, and the best ways to invest and create a future with cash in the bank.
Rich Dad Poor Dad for Teens by Robert T. Kiyosaki
This book might be a better choice if you have an eleven-year-old child or older. The story covers the author’s birth father and his best friend’s father—the differences between them and the myth that you have to be rich to invest. There is more than money in the book; at the same time, it teaches making intelligent choices to parents and children.
Many kids nowadays are fans of games. If that’s the case, the easiest way is to teach investing through the stock market game. There are numerous options, and you must choose to match your child’s interests. Here are the two options:
The Stock Exchange Board Game
If you have ever played Monopoly with your child, this board game has a similar concept. It costs around $50, and it is intended for kids over the age of ten. The competition aims to learn about the risks and rewards of investing while saving for retirement. Each hand around the board is like one year of life. Along the way, each field allows buying and selling stocks, bonds, and gold.
The Stock Market Game Online
Unlike many games out there, this is a project of investing for kids, from a nonprofit SIFMA Foundation. Their goal is to prepare students for financial independence. They understand the world of finance through investing and personal finances. But, it’s not reserved for schools only. However, your child will need you to open the account. Access fee depends on the state you live in. The game is intended for kids between ten and seventeen years.
Apps are not just games; there are educational games that can teach your kids financial literacy. Although there are numerous options depending on your needs, BusyKid is a chore and money management app for kids. BusyKid was developed for children over five years of age by a parent who understood the need to teach kids money management and how it is essential for their future.
Through the easy interface, your kids can earn money while completing chores, earn bonuses for extra efforts, save, donate a portion of their allowance, and learn the basics of investing for kids. In addition, the app allows a child to select stocks to buy from the child-friendly platform. A parent approves and makes the purchase.
In addition, parents can monitor their spending, set the schedule for recurring allowance payments, or approve each individual. Finally, if you want to teach them how money works, you can get debit cards for up to five kids in the household.
Learning to Invest can allow kids to participate in their financial future, build confidence and enhance their chances of success. In addition, parents help the child become more financially secure by providing them with access to real-world things and examples.
How to Help Your Children Jump Start Their Future: Options on Investing for Kids
Many parents consider early start options for their children. As you may know, for a minor, the possibilities are limited. However, you as a parent can choose between different account types to invest on behalf of your kids. Making this step while they are still young can help their education about compound interest and their future college choice. In addition, by avoiding loans for tuition, there is a good chance they will be debt free.
But, before you open any of the accounts, consider some factors or needs that may influence your choice. If you are unsure of the answers to these questions, it’s best to speak to a financial advisor to help you make the right choice.
- What is the time frame you are considering for your kids to withdraw those funds?
- Are there any inheritance tax consequences?
- Are there additional costs while opening an account, accessing, and managing funds?
- What risk are you willing to make while targeting a better return on investment?
Custodial Roth Individual Retirement Account (IRA)
A Roth IRA is a type of individual retirement account that allows for tax-free growth and withdrawals in retirement. According to guidelines, you can withdraw your money if you have owned it for more than five years and you are 59 years of age.
In your child’s case, you can put their income into this account. The contributions to it are growing and are tax-free. That means you, as a parent, are the account owner, having permission to manage the assets until the child becomes an adult. Once they come of age, they can use contributions, but only if the account has existed for more than five years.
529 Education Plans
Suppose you plan on making a fund for your child’s college expenses, then perhaps a 529 education plan is the best choice. Most parents with the same goal choose this type of account because there are no contribution limits. However, there may be a gift tax deduction.
In addition, there are two types of 529 plans: prepaid tuition plans and education saving accounts. The difference is that a prepaid account works as a prepaid debit card. You buy college credits at the prices today. On the other hand, education plans allow you to build a balance and invest that money in the market.
The Uniform Gift to Minors Act (UGMA) and The Uniform Transfers to Minors Act (UTMA) Trust Accounts
Uniform Gift to Minors Act and The Uniform Transfers to Minors Act are custodial account types. For example, a parent can open an account for the child and act as a funds caretaker until the child becomes an adult. Custodian or parent, in this case, can make investments with the funds into stocks and bonds. Unlike 529 plans, these accounts are flexible and can be used for whatever purpose, not only for education.
Certain brokers have accounts designed for kids. As a result, they have low fees and provide a long-term investing strategy. Unlike the previous types of accounts, a Brokerage account can be on a teen’s name if they are between 13 and 17. They give teens a sense of ownership and independence.
How Investing for Kids Can Assist Them in Achieving Financial Independence
Every parent dreams of their child being a successful adult. Therefore, starting planning their financial future as early as possible is essential. It is surprising how many kids do not understand the value of money because most of them reside in a micro-world of instant gratification. Of course, nothing is wrong with that, but by teaching your kids how to manage and invest money, you are giving them a tool to be self-sufficient.
That means your child won’t run back to you once they are older to borrow money. Government statistics show that six out of ten parents admit to lending money to their adult child in the last twelve months. Unfortunately, life often throws a curveball, and while returning the debt for college, your kid can end up with a house credit. Everything happens at once, and many of them can’t deal with it.
That is why teaching them finances is extremely important. Once they comprehend every aspect, they can make intelligent choices regarding money spending. Investing is perhaps the best tool you can give them because they are just starting in life, and their goals might not be apparent at the moment. However, when the time comes they want to ensure themselves for the future, your lessons might come in handy.
That means, even now, allowing your child to purchase stocks. If you don’t want to open a joint bank account, you can use apps such as BusyKid to let them experience what it feels and looks like to own a tiny fragment of a company. However, transferring some of their money to savings is a good idea. From time to time, check the returns on their investment and discuss them with your child.
Setting Goals – Making Plans
Your teaching does not stop there. You have to follow their progress with age. When they want something, this is your cue to start explaining financial goals. Be honest with them. If you have a teenager who plans to move out to try and live independently, support them and explain what they will need. The sole purpose of setting goals is to get your kid to start thinking about their future. You can help them by setting a framework and explaining why that is important. Help them see the steps that lead to goal completion.
Assuming you have already started with your child on savings and investments, help your child create a budget with current funds. Allow them to monitor their spending, goals, debt, or income. Whatever it may be, help them plan their spending abilities in the current situation.
Real World Problems
Most parents pay for everything that has to do with the household, even if their child is an adult. Setting them on the right path is giving a little tough love. You can sit down at the table and discuss which bill they will pay based on their financial situation. It is not about the money but instead instilling the habit that they have to give a certain amount of their money for real-life expenses. Even when they start living independently, they will have a monthly bill.
Perhaps it is human nature, but you feel they need to make a financial plan for the future with an expert. For whatever reason, whether they are either not listening to you or you are just unable to complete the steps, it’s a good idea to bring in a financial advisor and help them pinpoint their savings plan. Perhaps then they will have more sense of control over their financial situation.
Don’t forget to monitor their overall progress and be sure to praise them if they are doing well. These four steps or checklists, if you will, are an elaborate version of that piggy bank with separate compartments. For example, there is a relation between saving, spending, investing, and sharing. The latter does not have to be donating money to a reasonable cause but donating to their parents to show they can use their budget rationally. It’s necessary to allow them to enter the big world equipped with the knowledge to make wise decisions.
Conclusion: Teaching Children About Money Is One of the Most Important Lessons They’ll Ever Learn
Money intertwines with everything we do in our daily lives, from shopping for groceries to paying bills. So, it’s essential to let kids know how to make objective decisions and get acquainted with possible risks. Money is easily lost; hence saving and investing is the only way to get a hold of funds and stretch them into the future. Investing has advantages and disadvantages, but it is a valuable life lesson, whatever the outcome.
Let us not forget about the lessons they observe rather than the ones you teach them. Kids are very attentive and pick up the signs from your behavior. For instance, if you tell your spouse that you spent too much on some things and then go shopping, you send them the wrong message. In other words, lead by example if you want your child to have good spending habits.
These mundane moments like planning a trip or visiting the bank are great tools you can use in teaching them about saving, spending, and budgeting. They are your best resource for putting theory into practice. Tell your youngster how much money you have for spending and your priorities when you reach the store.
Explain to your child why you choose one item over another and how discounts and coupons work. In addition, allow them to buy something from the store that costs less than $2. You are in for a surprise what kind of excitement you’ll get in return. In addition, you can expect a little show-off from them.
Taking your child when dealing with finance is an excellent opportunity to broaden their knowledge. Even better, if they start asking questions during the process, it opens endless possibilities for more conversation. Educating kids on finance and investing is like a long marathon rather than a short sprint.
The Significance of Financial Literacy for Kid’s Life
Managing personal finance is 20% information and 80% behavior. That means everything you learn. You can apply it in real life while paying bills, making a list of things you need, and determining your goals. Hence financial literacy is essential to make sound decisions and reach the goals you want.
If your child learns how to save, budget, spend and invest, they can handle their finances more comfortably and have a great chance of dealing with unexpected troubles by understanding how to solve the money issues once they arise.
There is a disturbing statistic that many teenagers who moved from their parent’s homes to live independently are having trouble with money. For some, it becomes overwhelming, and they get anxiety and depression. If you raise a child who knows money management and you teach them the basics of investing for kids, they will be monitoring their expenses and bank account to recover or prevent problems.
The truth is most financial decisions happen when you are young. You have a house and a car at your age, and your situation is solved. But, for teenagers, it has only started. That means they have to deal with financial issues by themselves. In return, they will be ready for future expenses such as college or vacation.