How to Teach your Children about Making Investments

The best teacher of any subject is a good role model.  Making investments is no different.  A parent who is knowledgable about handling money and making investments can demonstrate how to do it to their children.  Start with simple ideas and expand as the child grows and matures.

Since the idea of making investments is to use money to make money, teach a young child to save. Many investors get into debt and trouble by spending and/or investing money they don’t really have.  Children can never be too young to learn how to handle money and to build a “nest egg” to work with.  Talk about it, even to a very young child.  Many parents buy piggy banks for their newborns, put in coins a plenty in the beginning, then taper off to pennies now and then, yet often never sit down with the child and talk about his or her money.  When the preschooler is learning to count, let him count pennies.  When he starts adding and subtracting, use money for exercises.  When he can read some, show him your bank savings statement and explain how important it is to save. Children  may not fullly understand what you are talking about then, but they will absorb it.

Once enough money is accumulated in that piggy bank, open a savings account for them.  When they get money for their
birthdays and Christmas, give them some of it and take them to the bank to deposit the rest.  Show them the interest they get from their savings and explain how it adds to their total.

When they have completed basic math which includes fractions, they are ready to understand a bit more. By that time they may be getting an allowance or payment for doing chores. Sit down with them and help them plan what they will do with that money. Of course, a certain fraction or percentage will go into their savings account. (This exercise will help them relate their math to daily living.) Encourage saving by offering to match what they put into their savings account.

Next, when the child is old enough to understand a bit more, sit down with him and check different earnings rates. Compare savings accounts with money market funds and CDs. Help him to understand the differences of these accounts and suggest ways he might want to divide up some of his savings.

Depending on the child’s maturity, have him sit in with you as you are making your investment decisions. Give him some play money you can make yourself and let him “invest” and keep track of earnings or losses. Penny stocks can be quite fun to “play” with at this point. Explain the high risk of these stocks, then let the youngster pretend to invest using some with play money at first to see how they do.  Later use small amounts of real money.  Perhaps you can make small “loans” for some real investments.  Charging a small amount of interest for the “loans” can help a young person see what happens if they lose money they have borrowed!   Don’t forget to show your child some of your own gains and losses and talk about your mistakes. Maybe he can learn to avoid the same type of mistakes.

By mid to late teens your child should be able to make some fairly good decisions and may be ready to risk some of his own money. Counsel him about what percentage of savings should be put at risk and talk about distribution of investments among conservative vs high risk investments. Continue to encourage savings with money he/she earns from working.

One good lesson that can be learned by investing is delayed gratification. Most investments do better over a long-term rather than buying and selling quickly. A young person can see how waiting for gains can be better than quick turnovers. You can also learn this lesson. Teaching your child to invest may not pay off in the short run. It’s doubtful that a prospectus will be more tempting than Harry Potter. When your son or daughter is an adult, however, you may have the pleasure of knowing they have some financial savvy, all because you took the time and patience to teach them about investing.