What is your first financial memory as a kid? Perhaps it’s when you got your first piggy bank, or when you walked into the bank with your parents to open up your very first savings account. What an indelible moment for everyone.
But when rates are low as they are now, perhaps encouraging your kids to take the next step and invest is a wise move. Through investing, a child learns about businesses, economics, politics, competition, financial statements, how to analyze the news, diversification, and so much more.
There is definitely a place where a savings account should be highly regarded. Savings is a foundation for personal finance success after all. Everyone needs a “rain day fund” to draw from. But if the goal is to further teach your child about building wealth, it’s best to introduce the concept of investing.
By starting early, they could experience compound interest to its fullest potential. In this example, courtesy of The Digerati Life, if your child (Tim in the chart below) was able to invest just $500 per year in an account that earned 8% per year from the age of 10 to 25, he could acquire nearly $500,000 by the time he is 65.
On the flip side, if they were like Sally who was unable to invest until 46 years old and then contributed $4,000 per year at the same 8% return, she would accumulate significantly less at $197,000. Which investment line would you choose?
How do you get children interested in investing? With a few pointers your kids might actually enjoy learning about the stock market and find it fun to watch. Kids today are quite technically savvy and pick up concepts quickly. Plus, engaging them while they are young could even set them on a course to acquire great wealth.
1) Use Their Interests
One of the easiest ways to get kids excited about the stock market is to use their interests. Identify what they like to do. If they like video games, you can teach them about investing in companies like Sony or Electronic Arts. If they can’t get enough of their iPad, you can talk about technology companies and look at historic charts together and how companies have performed around product launches.
One helpful way to generate interest from your kids is to introduce them to the concepts of motifs, where you can show them several companies that are focused on themes or ideas that may interest them, such as sports, toys, gadgets, and education. If your child can relate to the motif, they may become more excited about how their interests can lead to investment ideas.
Be sure that your children are actively participating in the investment process. You can watch tutorial videos together on investing. They can observe how you input trades and how funds are transferred. The more they can observe and visualize, the more excited they may become with investing. You can incorporate real people as inspirations to your children as well. Take Warren Buffett as an example. He made his first stock purchase when he was just 11 years old and was forever hooked. After years of working hard and investing, he has now become a multi-billionaire. Custodial accounts are one example of how parents can establish accounts on behalf of their children.
2) Have Fun Monitoring Investments
If you present investing like a chore that your children need to do because you said so, that’s likely how they will treat it. They’ll tend to dread your direction and want to do anything other than sit with you and analyze investments. But, if you introduce concepts and investment selection like a competition or a game, the conversations may be fun and exciting. It’s rewarding to teach your children the importance of monitoring investments. Encourage them to have fun by staying engaged and watching how investments can change every day in reaction to events going on around the world.
For example, you can have a friendly family competition where each person selects a motif, or creates their own motif. Monitor the performance over an agreed upon time period together and have an exciting reward or incentive for the person who has the best returns. Not only will your children learn more about everyone’s investment selection, they’ll also learn how much investing can help them in the future.
3) Keep It Simple And Transparent
As your kids progress, they may have questions about your real investments. This is a good opportunity to help them understand the risks and volatility involved with investing. You can use your own investment performance history, or charts of stocks and motifs they like, to help them understand through visualization. The more they know, the better prepared they will be to invest themselves.
Relay to them some helpful tips of investing: start early, contribute regularly, monitor performance, diversify, and avoid scaring yourself out of the market. Keep your explanations simple and transparent. Using numbers is one way to help them understand the benefits of the above tips. For example, you can use a stock’s performance history to explain how starting early can have greater purchasing power. Using a company they may know such as Hasbro (HAS), you can explain how $500 would have been able to purchase approximately 33 shares back in January 2000, versus only about nine shares today. Kids generally have a good grasp of what cheap versus expensive means, so using real numbers to show how much they could have bought at two different points in time can help them learn.
Secondly, you can discuss how compounding interest can make a significant difference when you contribute often. Using a rate of 8%, the charts in this post show how $50,000 contributed in $1,000 annual increments over 50 years can grow to approximately $620,000, versus $50,000 contributed in $10,000 annual increments over five years arrives at only about $63,000. Additionally, you can simplify concepts such as diversification by explaining the risks of putting all your eggs in one basket versus two or three, using an expression they are likely familiar with and can visualize. Beyond this, have fun learning with your children. Your financial lives will likely benefit from this experience.
4) Inspire Them With Examples Of What Other Kids Have Done
Sometimes the best motivation for children doesn’t come from an adult or superior, but from other kids. The 6th grade students in Fargo, North Dakota can certainly provide some inspiration for your children. All together, they selected a variety of stocks and created their very own motif.
Their stock selections were based on companies that they were familiar with, which made products they enjoyed. These were stocks such as Netflix, Facebook, and Under Armour. Over the course of four months (from November 1, 2013 through February 28, 2014), their motif earned a return of 21.6% and outperformed the S&P 500 by 10.2%.
5) Make Them Understand There Are No Guarantees
Only understanding a bull market where most asset classes go up is dangerous. Teach your children that investments carry risk. The higher the risk, the higher the potential for loss. It’s very hard for anybody to truly understand their risk tolerance until they actually begin to lose money. Use one of your actual investment loses as a learning point to share what went wrong and why. The sooner an investor can understand their true risk-tolerance, the better off they may be when their money is at stake.
Motif Investing offers a wide assortment of investment products and services to help you and your family plan for retirement and build wealth. Select motifs that suit your investment needs and risk preferences, and have fun exploring these options together.
Photo Credit: http://pixabay.com/en/money-bank-deposit-grow-up-income-549161/