Like teaching your kids the importance of being kind, generous and honest — there’s also teaching them to be smart, especially when it comes to money. With saving, instead of getting them to save a few dollars for a rainy day, why not teach them the value of investing for the opportunity to do more with their money?
Investing might sound like a complicated, intimidating thing but with the right tools and a little know-how, teaching your kids about the value of investing can be as simple as reading them a bedtime story.
What is investing?
We get it, the topic of investing is a lot to digest let alone teach. But a good place to start is getting familiar with the basics yourself. In fact, financial expert Effie Zahos shares that a lot of parents say they don’t feel comfortable showing their kids how to invest when they don’t necessarily feel like they’ve got their ducks in a row themselves.
Let’s start with the word itself, investing. What is it and what’s all the fuss about? Put simply, investing means spending money, with the aim to make more money. This means purchasing an asset or item with the hope that it will either generate income or increase in value at some point in the future.
However, growth and investment returns are not certain and there are different levels of risk associated with different types of investments. That’s why it’s important that you seek financial advice before making an investment so you can determine if it’s right for you.
To help you get more familiar with investing, here are some more investing ideas, explained:
An ETF, or an Exchange Traded Fund, is an Investment option that provides exposure to a mix of companies. This is a simple way for investors to diversify their portfolio into a larger number of companies, markets and industries.
Doing this could reduce the risk of investing should one company not perform as well as another.
Compound return simply means earning returns on your investment, as well as on the returns that investment earns. In other words, it is interest on interest. Think of this as a rolling investment snowball. As time goes on, the snowball can keep getting bigger.
Time is your friend
The top 500 companies in America have on average returned 10% per year between 1920 and 2019. With your other friend, compound returns, you could increase the rate at which you receive returns. For example, a 10% return over a year on $10 is $1. In the second year, a 10% return on your $11 is $1.10. Over a long time period, this $0.10 additional return adds up. For example a 10% yearly return, on your initial $10 for 18 years would leave you with $556!
Why you should teach your kids about investing
Teaching your kids about investing is a great way for them to learn about money and to sneak in some quality family time. Instead of letting your kids save their money in a drawer, shoebox or under their mattress, get them into the idea of investing to help them build a brighter future.
Let’s look at some of the main reasons why it’s important to teach your kids about investing and how it can benefit them.
1. Give your kids a bright future
By encouraging them to invest their savings now, their compound growth can start paying off by the time they’re ready to fly and leave the nest. When they become adults, their life choices and opportunities can open up as they would then have more money to help put towards a car, a home deposit, support their education or kick-start their career.
2. Teach financial independence
By teaching your kids about investing early, you’ll be arming them with the skillset to reach financial independence. As much as we’d love to support our kids every step of the way, helping them build the confidence to make their own life choices is a great skill you can teach through investing.
3. Develop goal setting skills
Teaching your kids about investing can not only give them an important life skill but also help them understand the importance of goals. Kids who develop goal setting skills early will be able to transfer those learnings into other areas of their life like being more decisive and action-orientated when approaching tasks.
4. Build healthy financial habits
Showing your kids the fundamentals of investing early can help them develop healthy financial habits. By opening up conversations about saving, budgeting, goal setting, and investing, your kids will feel more confident when it comes to money matters. In time, they’ll get into the habit of managing their money in a safer and smarter way.
5. Encourage and nurture ownership
A great part of encouraging your kids to learn about investing is giving them the tools to develop ownership skills. Start a conversation with your kids about what they’re interested in. This can then help you find a plan that aligns with their interests so they’ll be more engaged and invested towards achieving their goals.
6. Risk associated with Investing
If your kids are going to understand investing, it’s important that they know it’s not going to be sunshine and rainbows all of the time. Let them know that investments can be risky, and while there is potential for your investments to grow there is still a very real chance that they could decrease in value. That’s why we encourage investments to be made on a long term basis.
When to start teaching your kids about investing
While it might seem like investing is a little too complicated for your kids, you might be surprised at how quickly they can pick it up! As most parents will know, kids at an early age are incredibly adaptable and extremely quick to learn new things. So, why not teach them some helpful money skills that can set them up with healthy financial habits for life?
If you’re wondering when to begin teaching your kids about investing, try getting them on board as early as possible. One of the benefits of investing early is the ability to show them the value of compound growth — the sooner you start, the more you will see those compounding returns work harder for their future. But remember, as we discussed above, risks still apply.