Your Child's Fortune: 10 Tips to Teach Investing to Kids
It's Never Too Early, or Too Late, to Show Kids the Investment Ropes
So how did Black Friday go for you? On the one hand, there’s 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).
OK, so 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 all fine and dandy for the holidays, maybe it’s time to think outside the gift box. That is: What if you started your kids down the road to investment?
Get Started Now
It’s never too early to start teaching your kids about money, says Melanie Mortimer, President of the Securities Industry and Financial Markets Association (SIFMA) Foundation. “By starting as early as 3-years-old, your kids can grow up to be part of a more prepared and financially savvy generation.”
Really? Three years old? When you think about it, the beginnings of investing start with that cash cow for the ages, which is actually a pig. “Giving kids a piggy bank will help teach kids the main values of saving and investing,” Mortimer says. “Tell your kids that they can buy something special once the piggy bank is full.”
Some piggy banks even exist that transcend that admirable goal. Susan Beacham, the founder of Money Savvy Generation, trains kids in financial literacy through an exceedingly clever tool: a plastic piggy bank with four “bellies,” if you will. The “Money Savvy Pig” has compartments for the priorities Beacham contends they need to learn: spend, save, donate and invest.
“Our kids are incredibly savvy when we ask them to be,” says Beacham, who should know: She’s a parent herself. “We're not raising kids, we're raising adults. As soon as we change that paradigm in our thinking, everything with our kids changes. The job of teaching kids about money starts when we have them.” It’s even possible, that the child who starts very young could find their way to achieving an American investment ideal.
"If you know how to behave like a millionaire by the time you're 21, you may not have the cool million in hand,” Beacham says, “But you’ll be on your way. You’ll have the seed money and you’ll have established the good behaviors.”
How can adults help their children learn the ropes of investing, and start them on the way with the soundest of financial habits? Here are a dozen best practices and tips from financial experts, many of whom, like Beacham, have learned from their parenting, and so practice what they preach.
Setting the stage: From saving to investing. While saving is an easy way to relate—even a child can do it, right?—investment is the next step in making money work. “Point out to children the difference between saving and investing,” say Bonnie T. Meszaros and Carlos J. Asarta of the University of Delaware’s Center for Economic Education and Entrepreneurship. “Go over the risks and rewards of each and include discussions about not putting all of your eggs in one basket.” As a jumping off point, Meszaros and Asarta recommend the Consumer Financial Protection Bureau’s website, Money As You Grow.
Keep it simple, speak their language. Growing up south of Pittsburgh, Andrew Murdoch started saving his paper route Christmas tips from 9 years old until he had several hundred dollars. It started him down the road to a love of investing, but he cautions those that would do the same with their kids to begin with the basics, no matter their age.
“Don’t start off explaining relatively complicated concepts, such as the difference between an ETF and a mutual fund, or how to short a stock,” says Murdoch, president of Somerset Wealth Strategies in Portland, Ore. “Explain that investing is basically just a means of using your money to create more money. Buying a stock is just buying a tiny piece of a company and will track the performance of the company over time.”
Teach with stories. Kids (as well as adults) are hard-wired for story: It’s what keeps us returning to movies, and compels youngsters to beg parents to read to them at bedtime. “Engage them in your investing activities and narrate the ideas of investing,” Mortimer says. “Talk to them about your own saving and investing plans—and explain to them why you are saving and how it will benefit you in the long run.” That means relating experiences from your past, or showing them in real time how you’re putting to work the values you’ve learned. “For example, if you’re getting your shoes repaired rather than buying a new pair, explain how by delaying your immediate gratification of having a new pair, you’re actually saving money that you can use for something bigger later on.”
Know your child’s learning style. A visual learner will quickly become bored with a conversation about investing,” says Jared Snider, senior wealth advisor at Exencial Wealth Advisors in Oklahoma City. “Observe how your child learns and ask their teachers for insight into your child’s learning style. Fit your investing conversations into that style. Use multiple sources to communicate such as pictures, videos, smartphone apps, stories.”
“Game” the market. You can start younger kids off by giving them a play money portfolio and tracking the results. “Make it fun by making it a game at first,” says Rebecca Pavese, a financial planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office. Pavese, who’s also a mom, advises using online competition tools and/or create and track investments together. “Playing through the simulations first will allow you to spend time with your child and open dialogue about the “rules” of investing,’” she says. If you’re looking for an online tool, the SIFMA Foundation offers the Stock Market Game that teachers can use with students in grades 4-12, and works in conjunction with a mobile app.
“Computer game” the market. Another way to take fun route 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 happy accident nor random stab at novelty. The platform is the brainchild of video game entrepreneur Gaspard de Dreuzy (who has close to 20 years experience in the field) and financial technologist Serge Kreiker, a former software engineer at Bloomberg LP. It also features practice trading, too.
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. “Pick one share each and have some be dividend payers, some not.” Better yet, “make them companies kids understand: Walt Disney Co. (ticker: DIS), Coca-Cola co. (KO), Nike Inc. (NKE). It will give them an appreciation for compounding, yield and the fact that some wonderful companies aren't necessarily great investments.” True, losing could hurt—but it’s your money, right Santa?
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. “Demonstrate the power of investing over time via compounding,” says Dave Geibel, senior vice president and wealth advisor at Girard Partners in King of Prussia, Pa. “Starting to invest at a young age allows a child to witness growth and experience the common ups and downs of the market. Volatility is normal and knowing this, and investing through it, will keep emotions in check when investing at an older age.
To make this relatable, 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 three percent on your money annually, it will double in 24 years; that is, 72 divided by three.
Don’t forget giving. Legendary investors like Warren Buffett believe deeply in giving—and not as an afterthought. “We started with our kids once they were old enough to put the offering in the plate at our church,” says Daryl Dagit, financial advisor and market manager at Savant Capital Management and based in Peoria, Ill. “And once they started receiving cash gifts for birthdays and doing extra chores around the house, they were taught to put some in the bank, give some to Sunday school and that it was okay to spend the rest.”
Pass on your parents’ gifts. Marguerita Cheng, CEO of Blue Ocean Global Wealth, has experience aplenty taking her daughters holiday shopping. But she’ll also pass on the financial gifts her father gave her. “Parents can have kids invest in stocks via a dividend reinvestment plan,” Cheng says. “I distinctly recall my dad discussing the price of IBM stock and how he purchased it via payroll deduction. In fact, this is exactly how I learned to read Value Line [an investment survey]—and how Dad helped me pay for college.”