Why You Should Teach Your Child to Invest While They’re Still a Child

If you’re a parent, I’m sure you’re trying to teach your child to save their money, but if you want to set your child up for a higher level of financial success, you must teach them the difference between saving and investing . This early lesson in financial literacy could be the difference between a comfortable nest egg and financial hardship later in life.

The difference between investing and saving

The concept of saving versus investing is quite simple: saving is the gradual saving of money, usually for some specific future purchase or as a contingency cushion. Savings are virtually risk-free. On the other hand, investing is putting money aside for the sole purpose of making more money, and it comes with some risk.

It is easier for a child to illustrate saving than investing. Children understand the piggy bank that if they put some of their money into a savings account for a couple of birthdays, they can afford the bigger toy they want, so it makes sense to introduce them to this at a younger age. Investing is a more abstract concept as it involves pooling your money with others and participating in financial markets that can be hard to imagine. This also includes long term thinking and the idea of ​​non-monetary rewards in the far future. “You can pay for a good nursing home” isn’t very convincing to most 12-year-olds.

When is your child ready to learn how to invest?

According to Melanie Mortimer, fund manager for the Securities Industry Financial Markets Association , children in fourth grade are ready to learn about investment markets. “When you are 9-10 years old, you study fractions; you learn decimals… The idea that you can take something very small and grow it into something much bigger is very appealing to them,” Mortimer told Yahoo! Finance.

How to illustrate investing to a child

For younger children, the Richify website suggests using a lemonade stand as an illustration of how investing works. Investors (in this case, parents) shell out money for lemons and sugar. The baby stands in the hot sun and does work while the parents are resting. If the booth makes a profit, the parents get their investment back and a little more. The baby’s profits can be invested in lemons and sugar to avoid investors, or kept and investors can add more money to make a profit the next day. If the stand breaks down, the parents, taking the risk, lose their initial investment, and the child loses only the time spent selling lemonade.

Don’t throw your kid into the stock market until he’s ready.

A basic understanding of investing through a lemonade stand is a good start, but when your child is a little older, you need to introduce them to the general risk and reward of the financial markets where they are likely to invest their real money. .

Jumping straight into the Dow Jones or the NASDAQ may not be a good idea. Some people suggest letting your child choose the stocks they like and actually buy a stock or two, as well as tools and games like The Stock Market Game , a website that lets you build a portfolio of stocks to see how you are doing. lead in real life. the market, if you were to buy them, might interest the child and provide an understanding of the basic concepts of the market. But in real life, investing by picking individual stocks is usually not a good idea.

How is Yahoo! The article on finance notes that for kids, you should start with basic financial concepts like inflation, risk and reward, and compound interest. The basics of investing aren’t as appealing as buying a thousand GameStop shares and selling before the bubble bursts, but real life is more likely to be about putting part of your paycheck into a 401K plan rather than high-risk financial instruments – boring but reliable. .

If your child is passionate about money and investing like the future Warren Buffett, they will have a lifetime to learn the ins and outs of capitalism (also congratulations! Play your cards right and you will end up in a good retirement home.) But for most kids, basic financial literacy should be enough to live a life and keep them from throwing money away. In fact, it is more difficult to instill investing as a habit , but probably more important than deep knowledge of the market.

Teach your child to pay themselves first.

The habit of investing can be the most important gift you give your child, so try to get it into his head.

Experts generally recommend using 10 to 20% of your income for investment , and they can open a Roth IRA as soon as they start generating income , even just babysitting or lawn mowing. Emphasize that this money is only for making other money. It’s not to buy something, and it’s not to wait for a rainy day.

When budgeting with your child (you budget with your child, right?), teach them that this 10% is paid first . You want them to understand that this is their own payment. It’s not an afterthought or something you do “when you can”; this is a requirement. Point out that they probably won’t notice a dime of the dollar right away, but when they retire they will be amazed that they are rich.

Take a second and really imagine if you’ve been doing this all the time (I haven’t done it either) since you first started making money. Do the math : 10% of everything you’ve ever earned, an 8-10% return per year, and about 50 years of interest. That’s a heartbreaking amount of money, isn’t it? If you were only making $12 an hour in your entire working life, you would still be a millionaire when you retire.

More…

Leave a Reply

Your email address will not be published. Required fields are marked *