A prodigy once said -when it comes to investing, time is really our greatest ally. I couldn’t agree more. The more time your investments are allowed to grow, the larger the basket is likely to become. Naturally, the sooner you start your investment journey, the better - be it 8 or 80!
But the trouble is that most people aren't taught the concept of investing until their first 401(k). And by that point, you've already lost a decade or more of time. Just imagine how much wealthier we'd be if you started investing when you got our first after-school job as a teen instead of waiting for adulthood.
To that end, here are seven steps you can take to teach kids how to invest:
1) Include kids in financial conversation: If you want your children to be comfortable investing their money, they need to be comfortable enough with the concept of money in the first place. Don't avoid talking about money just because your kids are young. Even casual dinner table conversations can be extremely important to help kids understand what it takes to earn money, to have a budget, to pay bills and to be able to make choices about the things you purchase.
2) Teach Kids Investments aren’t gambles: Children also need to understand the real purpose of investing—and it’s not to gamble money. You don’t invest money one day and get 10x returns the next day. You also don’t invest without a clue about the asset. You instead invest with a goal in mind that you want to achieve and you steadily work towards it. It’s a great way to teach your child about delayed gratification, an important lesson for any investor to understand.
3) Explain the Power of Compounding: The power of compounding is how investors are able to have their money make money but this is a hard concept to explain to small children. Use illustrative examples such as the doubling penny exercise to break the concept down for them.
4) Teach them various investment avenues: Chances are, your child has already heard about stocks and bonds and has some faint idea about what they mean. But it’s important to understand that those are not the only investment options. There are many, many avenues of investments in the modern day - real estate, art, wine, derivatives, crypto, NFTs and much, much more. Teach the importance of diversification early on!
5) Virtual Stock Markets: Stocks are the most common form of investment and they are great to get your child started! Give your children a more hands-on experience of the stock markets without the risk of losing money. You can make them try some popular virtual stock market simulators like the Investopedia Stock Simulator, Wall Street Survivor and HowTheMarketWorks. Gamifying makes learning far more effective!
6) Pique Their Interest With Companies They Know: "Buy what you know" has been an investor’s favourite maxim for decades. The idea is to put money in companies you understand and it's key when teaching kids how to invest. If they understand what the business does, if they use the product, they will better understand why a stock price might go up or down. Besides, kids today are skilled online researchers, trust them to figure the rest for themselves!
7) Open a Real Investing Account: Once your child is ready, all you need to do is get on your marks, get set and go! Let them invest their own money (check out our last blog) to get a taste of ‘real’ investments. Remember, you’re setting them up for life!
Since your children hopefully have several decades before they'll need the money, let them explore the markets and burn a finger or two if needed! They have all the time to experiment thankfully, unlike adults starting to invest whilst juggling a career and other commitments!