How to Teach Kids the Basics of Investing

By Evan Fischer
Sponsored Guest Contributor

Many parents realize that financial skills are an important part of functioning in the adult world, and so they teach their children about money management from an early age, through offering allowance for chores, setting up a savings account, and eventually showing kids how to balance a checkbook, keep a ledger, and even create a budget. But most adults fail to delve into lessons on investing simply because they don’t necessarily employ or understand the process themselves (although it could be that they just decide to cross that bridge when their kids come to it). However, it is important that children learn the benefits, drawbacks, and strategies involved in making investments for their future, as well as the basic types of investment options that are out there. Too often focus is spent on how to spend responsibly and not enough on how to save intelligently.

Here are a few tips to help you impart this information to your own kids and learn a great deal yourself.

Knowledge is Key

The process starts with knowing your stuff. If you don’t know the first thing about investing, your lessons aren’t likely to be terribly informative. So you should start looking into investments that could benefit your kids now and in the future, such as a 529 account that will allow you to set aside money for each child’s college education, or CDs that your kids can put money into in the short-term in order to begin earning more than they would with a basic savings account. Of course, you will also want to eventually discuss lifetime investments like 401K and Roth IRA plans, as well as the possibility of a rounded portfolio that features stocks, bonds, mutual funds, and so on. But you first need to understand what these types of investing entail, including risks and rewards.

Risks and rewards? Like we see in games? But of course! A lot of this investment lingo is super heavy for children and not at all meaningful to them until they are in their teens. Why not play games where economics are part of the overall play? This is a great way to start them at any age to learn the basics through games.

Helping Hands

There are a couple of excellent resources that can help you, both online and in the real world. For example, sites like Investopedia offer tons of information for the novice investor, including definitions of terminology, background and current news on various markets, and even financial tutorials and simulators that can help you and your children explore the ins and outs of the wide world of investing. But if you feel like you want to put your money where your mouth is, you might also talk to professionals like a financial planner or a stock broker. Leading by example is one of the best ways to teach your kids life lessons, so investing in a smart and informed manner could go a long way toward underscoring the benefits of saving and investing money.

The Value of Value

Still, you may face a brick wall when it comes to discussing finances with kids, especially if they are younger. Many children don’t deal with money on a daily basis and the lessons you’re trying to teach them may not hold much weight. You can give them information on retirement accounts and basic trading strategies until you’re blue in the face, but it will go in one ear and out the other. For this reason, it helps to have real-world examples. And understand, of course, we are not suggesting you tell your kids to “plan now”. This is all about starting the process of education. So start by arranging for your kids to make small investments, be they real or simulated. Take some money from their savings accounts, match it with your own funds, and purchase short-term certificates of deposit (6 months – 1 year, for example). Once they mature you can show your kids how their money has grown, which will no doubt make them keen on the prospect of future investments. To speed the process up, complete the exercise using a spreadsheet so as to demonstrate how much the investment looks in the simulated future instead of waiting for it to mature. Using a spreadsheet also has the added benefit of creating visual examples such as graphs and pie charts that can help you when teaching as a visual aid.

Good luck. It’s never to early, although it might sound silly to talk Wall Street with a child who still watches Sesame Street. Keep in mind, however, that the earlier you start talking about the value of money, the deeper the lesson will sink in. For example, you wouldn’t talk about drugs to your kids for the first time seconds before they go to school. By talking about it early, you prepare them early. And a prepared geek is a better geek.

About the Author:

Evan Fischer is a freelance writer and part-time student at California Lutheran University in Thousand Oaks, California. He enjoys writing about the latest tech news for a variety of companies and discovering new and innovative gadgets.