Your Child's Fortune: 10 Tips to Teach Investing to Kids

It Is Never Too Early, or Too Late, to Show Kids the Investment Ropes

Girl inserting coin from mother into red piggy bank on coffee table

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So how did Black Friday go for you? On the one hand, there is nothing like the lure of the Doorbuster: that ultimate big-screen buy or appliance prize that tempts people to line up by the hundreds, sometimes overnight, to get a shot at the booty.

But if your kids were watching, maybe you just gave them a double whammy lesson in financial foolishness. Not to be a Grinch, but unless you waited in line for the sake of having fun, the chances of coming out on top are formidable. If you braved a 4-hour line for a $100 discount, you only made out $20 better compared to making $20 an hour at your day gig (not counting the pizza you ordered in line).

Let us say, as an example, that you still scored some deals on a 20-foot-tall electric Santa and a barn-sized HD TV. But did you put those goodies on your credit cards? And if so, what does this teach kids about living within their means?

The point, holiday shoppers, is this: While presents are fine and dandy for the holidays, maybe it is time to think outside the gift box. That is: What if you started your kids down the road to investment?

Key Takeaways

  • Start simple: for example, you can explain that investing is basically just a means of using money to create more money.
  • Help kids grasp the basic concepts by giving them a play money portfolio and tracking the results.
  • To explain compound interest, teach them the “Rule of 72,” which states that money doubles at a rate where 72 is divided by the percentage gain.
  • Teach children the value of giving by having them donate some of their cash gifts, as well as saving and spending their money.

Start Teaching Your Kids About Money Now

It is never too early. By learning as early as 3-years-old, children can grow up to become more financially prepared and savvy. When you think about it, the beginnings of saving start with the use of piggy banks.

Some piggy banks exist that transcend that admirable goal. Susan Beacham, the founder of Money Savvy Generation, trains kids in financial literacy with use of an exceedingly clever tool: a plastic piggy bank with four tummies. This piggy bank has four compartments for the priorities Ms. Beacham contends kids need to learn: save, spend, donate, and invest.

The goal as parents should be to raise children as adults. If children know how to save or invest like millionaires by the time they are 21 years old, they may not have the actual million dollars in hand, but they will have established good habits to make it happen in the future. Here are 10 best practices and tips parents should keep in mind.

1. Setting the Stage: From Saving to Investing

While saving is an easy way to begin a child's financial journey, investment is the next necessary step in making money work. You should point out the difference between saving and investing, and go over the risks and rewards of each. Children should learn that they should not place all of their eggs in one basket. The Consumer Financial Protection Bureau (CFPB) offers some helpful materials to use with children.

2. Keep It Simple and Speak Their Language

You should begin with the basics and not with relatively complicated concepts, such as the difference between an exchange traded fund (ETF) and a mutual fund, or how to short a stock. You should explain that investing is basically just a means of using money to create more money.

3. Teach With Stories

Kids (as well as adults) are hard-wired for stories. You should narrate your ideas of investing and involve them in your investing activities. You can describe your own saving and investing plans and explain why you are saving and what benefits you will secure in the long run.

4. Know Your Child’s Learning Style

You should tailor your lessons and explanations about saving and investing pursuant to how your child learns best. For instance, a visual learner will likely become bored with a conversation about investing. You should also employ different sources and methods to communicate, such as with the use of pictures, videos, smartphone applications, and narration.

5. Game the Market

You can start younger kids off by giving them a play money portfolio and tracking the results. Playing through online simulations can create a space for you and your child to openly discuss the rules of investing. If you are looking for an online tool, the SIFMA Foundation offers the Stock Market Game, which can be used with children in grades 4-12, and which works in conjunction with a smartphone app.

6. “Computer Game” the Market

Another way to take a fun route with teaching children how to save and invest is through true-life “gamification” of the stock market. The website Kapitall uses drag-and-drop features and eye-catching icons, and any resemblance between Kapitall's user interface and a cool arcade diversion is neither a happy accident nor a random stab at novelty. The platform is the brainchild of video game entrepreneur Gaspard de Dreuzy (who has close to 20 years of experience in the field) and financial technologist Serge Kreiker, a former software engineer at Bloomberg L.P. It also features practice trading.

7. Buy a 10-Pack

Robert Johnson, President and CEO of the American College of Financial Services in the Philadelphia area, suggests parents give kids a portfolio of about ten stocks. You should pick one share each where some are dividend payers while others are not. This approach will teach children about compounding and investment yield, and will show them that investing in some of the best companies may not be the best investments to make.

8. Pique Their Interest in Compound Interest

The time it takes to compound an investment, and produce substantial returns, offers a real-world lesson in how money grows. Volatility is normal and knowing this, and investing through it, will keep emotions in check when investing at an older age.

To make this understandable, you should teach kids how compound interest works by the “Rule of 72.” According to this rule, money doubles at a rate where 72 is divided by the percentage gain. So, if you are making 3% on your money annually, it will double in 24 years; that is, 72 divided by 3.

9. Don't Forget Giving

Legendary investors like Warren Buffett believe deeply in giving—and not as an afterthought. When children receive cash gifts, they can be taught to put some of that amount in the bank and to donate some of it before spending.

10. Pass on Your Parents’ Gifts

As a parent, you can also pass along to your children any financial gifts your parents gave you. For instance, you can have them invest in stocks through a dividend reinvestment plan.

Frequently Asked Questions (FAQs)

How do you buy stocks for kids?

Brokerages won't allow minors to open accounts, but many do offer custodial accounts that are managed by a guardian for the minor's benefit. Money in the account belongs to the child, and it must be used for their benefit, but an adult manages the account until the child reaches adulthood. College savings accounts also allow minors to own investments, but there are more rules about how those funds must be used.

How should a kid invest with $20?

If you want to teach your child about investing with a small amount of money, then you should seek out low-fee investment options. Look for a brokerage with low (or no) commission fees, pick no-load funds, and watch the expense ratios of ETFs and mutual funds. Fractional share investing can also allow your child to explore more investments without needing to save up for a full share.