Investing is something a lot of us don’t think about until we’re adults. While we would say that there’s no bad time to start investing your money, we also know that people who begin investing at an early age are more likely to have the money they need later in life than those who wait.
At Addition Financial, we’re big believers in teaching kids about investing and money management, whether they’re in elementary school or high school. Here are some tips to help you teach your teenager or kid about investing and stocks.
Explain the Differences between Saving and Investing
To a child, investing and saving might sound like they’re different versions of the same thing. It’s essential to explain the differences between the two, so that your child or teen understands the benefits of each and where they fit into their overall financial picture.
Karen Condor is a Personal Finance Expert at USInsuranceAgents.com. She suggests the following:
“Parents can teach kids and teens about saving before investing, explaining what saving is for and following that up with explaining what investing is for. Then show examples of the benefits of investing, and start off their investing with conservative products, such as a certificate of deposit (CD), so they can witness how investing concepts are applied.”
We would add that it’s helpful to show kids a side-by-side comparison of how money accrues in a traditional savings account and how it could grow in an investment account with compound interest. In many cases, a visual illustration of the difference will make a more lasting impression – and be more easily understood – than a verbal explanation.
Show Them How to Evaluate Investments
Once your child understands the benefits of investing, the next step should be to build on that knowledge by explaining the basics of how to evaluate an investment.
Christopher Liew, CFA, is the Creator of Wealth Awesome. He made this suggestion:
“With stocks, teach them how to look at a company’s finances. Show them how much money the company made in the last year. Tell them that ownership of a stock means you have a small piece of that profit if the company pays dividends. Explain what a dividend is.”
With older kids, you can get into the differences between private companies and those that are publicly traded. You can also teach them the difference between a CD, which offers a guaranteed return, and a stock.
Teach Your Kids About Risk Tolerance
With kids of all ages, it’s a good idea to have an age-appropriate conversation about risk tolerance and what it means. A simple way to do it is to give them something that represents money, such as jelly beans, and give them three “investment” options. One is a safe option where they’re guaranteed to get a certain number of jelly beans at the end of the term. One is a medium option where there’s a risk that they’ll lose some jelly beans but they might end up with more than they would with the low-risk option. The third would be an option where there’s a risk of losing everything – or getting a big return and lots of jelly beans.
Decide ahead of time how the “investments” will play out and set a time to check in on their progress. This may be a lesson you need to repeat more than once and you can even carry it over into real-world investments at an appropriate level.
The issue of risk tolerance is one that's essential to understand and something a lot of adults didn’t learn as children. By teaching your kids about it now, you can help them understand risk versus reward and when and how to take risks with their money.
Help Your Children Make a Small Stock Purchase
One of the best things about living in our technological age is that there are so many wonderful tools available to help with teaching kids about money. Even young kids can learn the basics of buying a stock and watching its performance – and teaching kids about stocks is an essential step to helping them become savvy investors.
Max Kimmel is the Owner of One Shot Finance. He offered this advice to parents:
“Buy a stock for your child and have them watch it go up and down. This will get them interested, and also make them realize that the stock market can be risky if you aren't careful.”
Even a single transaction can be enough to give kids a hand-on experience with investing. To teach a teenager about investing, you might give them a larger amount and allow them to choose their own investments using an app such as Acorns, which lets parents set up custodial accounts for their kids. When your child turns 18, the account converts to a personal account that they can manage on their own.
Give Them a Portfolio to Manage
There is no denying that in many cases, hands-on experience is the best way to learn new concepts. We have two suggestions to help you provide your kids with experience in managing a portfolio.
The first is to buy your kids a “10-pack” that contains one share each of 10 different stocks. Some should be stocks that pay dividends. We suggest a mix of low and high-risk options that includes some company names your kids will recognize. As they watch their portfolio, they’ll learn about compound interest, investment yield and the risks and rewards of the stock market.
The second suggestion involves using play stocks and may be ideal for young kids who aren’t quite ready to manage a real portfolio. The Stock Market Game offers a kids’ app that teaches the basics of investing plus more complex topics such as short selling. Kids can watch their portfolio grow or shrink.
Build to More Complex Topics
To teach your teenager about money, you’ll need to meet them at an appropriate level. If your teen already has a basic grasp of investing and stocks, then it’s time to expand their vocabulary and knowledge base.
Bryce Walker is a CPA and the CEO of CPA Exam Guy. He told us:
“The markets and financial instruments can be highly complicated, but you can certainly teach your kids that equity represents an ownership stake in a company, that there are various ways to earn money when investing in the markets, including through both dividends and capital gains, and that certain stocks are riskier than others, as well as the idea of risk more broadly. A mock trading account that allows a young person to trade and observe market movements in real time is a great and safe introduction to stocks.”
As your teen becomes more sophisticated about investments, you can teach them more complex concepts, such as:
- The differences between mutual funds, exchange-traded funds and index funds
- What the Dow Jones Industrial Average and the NASDAQ exchange are
- What it means to short trade a stock
Make sure that your teen understands each topic before moving to the next. You don’t want to overload them with information but you do want to ensure that their knowledge base is growing.
Talk to Them About Retirement
The subject of retirement is one that most children don’t think about unless their parents bring it up. Here again, we believe that teaching the basics early will increase the likelihood that your kids will make retirement saving and investing a habit.
At a young age, you can talk to kids about the concept of retirement. If your parents or in-laws are retired, you can use them as an example. If they know that Nana or Pop-Pop don’t work, it provides a natural opportunity to talk about how they pay for things like groceries and utilities.
As your kids get a little older and learn about compound interest, you can tie that in to retirement planning and illustrate how saving a little money now can lead to a comfortable retirement for them in the future.
By the time they reach their teen years, your kids should be ready to learn about income taxes and Social Security and how they relate to retirement. If your child gets a job, reviewing their first paycheck can be an eye-opening experience that shows them how taxes affect their take-home pay.
Your teenager is also ready to learn about the various types of retirement accounts, including 401(k), Traditional and Roth IRAs, pensions and so on. Without going into too many details, you can talk to them about your experiences saving and investing for retirement.
Teach with Stories
Our final piece of advice is to engage kids of all ages with stories. Our brains respond well to stories and by sharing your own experiences and stories in the news, you can help them understand big concepts and get them ready to become responsible adults.
We suggest looking for news stories about investing. You could also watch movies about the stock market such as The Big Short, a film that looked at the housing bubble and financial crisis of 2007-2008.
Teaching kids about money and investing is a must for every parent. The suggestions here can help you get started and ensure that your kids have a solid base of knowledge about their finances and investing as they move toward adulthood.
Posted on May 28, 2021
Topics:
