How to Help Your Children Understand Investing

Conversations around saving and investing can ultimately better prepare your kids for financial success and be better equipped to handle their own money challenges. As business owners and industry leaders, you have a unique opportunity to share your own financial expertise with your children in a way that will lay the foundation for a strong financial future. However, it’s important to cater your lessons to your child in an age-appropriate and interesting way. Here are some helpful tips for talking with your school-aged children and teens about saving and investing.

Start with the basics

When talking with your young child about saving and investing, keep it simple and try not to overcomplicate things with confusing terms. Explain that investing is essentially using money to make more money. Introduce the differences between a savings account, which stores money, and investing, which uses money for risks and rewards. Then introduce different types of investments like stocks and bonds. Bonds are a lower risk since the return is small, and mature over a certain period of time. Stocks tend to have a higher risk, which can mean high reward or high loss.

Explain with pictures

Pictures and graphs can often explain the risks of investing better than words. Show your children a graph of the S&P 500 Index and explain that the index tracks 500 publicly traded companies and shows periods of decline and growth. Then you can discuss not only the risk involved with investing but also how the investment could pay off in the long run. You can also segue into a discussion about diversifying your investments. Try to show your children a company they know and are interested in, like Disney or Google. Then follow that company over a set period of time. You can teach your kids that the company’s stock usually follows how well the company is doing. This also points out why investing in several different companies and industries is so important, because if one company does poorly, others can hold up your investment if they perform better.

Follow the stock market

As your kids get older, it’s important to provide them with more real-world examples of how to invest. One way you can teach your teens about investing is by showing them your own stocks and talking about what companies you are investing in and how they have performed over the course of several years. Then ask your teen what company they would like to invest in—many end up selecting companies they are familiar with, like Apple or Amazon. From there, you can either purchase a few shares or follow the stock every day together for a few weeks so that your teen can experience how markets have up-and-down cycles and understand the risks and rewards.

Have a healthy mix

Remember the saying, “don’t put all of your eggs in one basket?” Well, the same goes for the stock market. It’s important to teach your child that you should be investing in a collection of financial investments like stocks, bonds, commodities, cash, and exchange-traded funds (ETFs) instead of just one individually. It’s also a good idea to be diverse in the companies, industries, and size of businesses you invest in. This is called the portfolio theory, an investment strategy that minimizes market risk and maximizes returns through diversification. This means you are spreading your money out across different investments to manage risk and reduce the volatility in the overall marketplace. 

Consider a custodial account

Once your teen has a grasp on how to invest, consider allowing them to have an account where they can see how investing works first-hand. A custodial account is a financial account that is set up for minors and allows them the opportunity to save while you retain full control over the account until they are an adult. This account can allow your teen the opportunity to learn some basic investing skills. This can be a great learning opportunity while also creating future investments.

Make money talk a habit

Talking about finances with your children will make them more comfortable with money. Try to include your kids in family meetings on budgeting, spending, and investment strategies.  Each time your child gets money, encourage them to save, spend, invest and give. This will start a healthy relationship with money and help them understand how to manage their own money better.

Investing, like anything else, is a skill that takes time to master. Whether your child is young or a teen, it’s never too early to teach them about money and investing. Introducing children to investing can help them lay a strong financial foundation that will last into adulthood.