Understanding how to invest can be daunting for many adults, so teaching children about investing can be a stressor for families. While the importance of early financial education for children is clear, determining the right approach can be challenging. However, it’s crucial to begin the process as soon as possible. A Bankrate survey revealed that 41% of teenagers do not receive any financial literacy education at school, and 54% feel unprepared for financial responsibilities in adulthood.
Given that financial literacy education is primarily the responsibility of parents, it is essential to engage in consistent conversations with children and help them grasp concepts like risk and reward, compound interest, and the investment process.
Begin on the right path
To kickstart your children’s investing journey, you or relatives can establish accounts that benefit them, such as a custodial brokerage account, 529 college savings plan, or a custodial Roth individual retirement account if they earn income. These accounts provide a head start, but it’s crucial for children to understand how they function and the benefits of allowing their money to grow over time. Involve your children in money discussions and consider the following:
Tailor it to their age
While introducing children to money conversations early is important, keeping the discussions age-appropriate ensures they can comprehend and absorb the lessons without feeling overwhelmed.
Start by explaining what a paycheck is and how you allocate money for essentials like food, housing, savings, and taxes. If there’s money left after meeting needs, you might choose to save more, donate to charity, or invest to make money work for you.
For older kids, discuss how investment money is transferred into a brokerage account and share details of investments. If they ask questions you can’t answer, research the answers together or seek clarification from a financial planner. Teach them to find reliable information and think critically about what they read—a valuable skill beyond financial literacy.
Involve them in financial talks
If you and your partner have regular money check-ins, invite your children to join part of the conversation. This inclusion, while age-appropriate, normalizes money discussions and encourages kids to think about managing finances daily.
Discuss your family’s financial values and let kids participate in decisions on allocating household finances. Seek their input on charitable donations and involve them in budgeting for significant purchases. Encourage them to set financial goals and help them create a plan to achieve them. Teaching them to work toward a goal at a young age can benefit them in the long run and offer a financial edge in the future.
Emphasize that investing is not a quick fix
Children should understand that investing serves a purpose and is not a shortcut to wealth. Emphasize the importance of consistent investment in lower-risk index or mutual funds over timing the market or chasing hot stocks.
Explain the significance of having a plan for every dollar and how investing creates options later in life. Establish a system of saving, spending, and giving using labeled envelopes, jars, or spreadsheets filled in with allowance and birthday money, discussing the choices for each category.
Assist them in opening a savings or investment account
When your child’s savings reach a set amount, help them open a savings account at a local bank. For older children, discuss the benefits of interest and its impact on financial goals, such as saving for college or a car. If appropriate, assist them in opening an investment account in their name that you can manage together.
While compound interest may be complex for young children to grasp, explain how their savings can work for them by allowing the bank to borrow money, resulting in interest. Extend this concept to the stock market and the potential for higher returns through investing, but caution them about investment risks and the absence of guarantees. Use this opportunity to discuss risk and reward, relating it to familiar concepts like strategic moves in games or sports.
In conclusion
You might believe your kids are too young for investing discussions or wish to shield them from financial realities for as long as possible. While these thoughts may be hard to dispel, it’s essential to involve children in family finances in appropriate ways and impart financial knowledge long before they become adults.
Utilize existing accounts as a starting point and share everything you wish you had known about finances. Instead of overwhelming both parties with a single lengthy conversation, find ways to incorporate financial discussions and lessons into daily routines.
The sooner children grasp financial concepts and investing, the more likely they are to develop positive money habits and financial literacy skills.
