There are a number of ways in which parents and teachers can empower kids for their financial future, many of which are based around allowing for failures. This is something we’ve made note of in the past, recognizing that mistakes are an important part of the learning process. Encouraging children to look at financial planning as a process helps them to develop the mindset of learning as they go, which will help them in their own, unique financial situations.
That being said, investing is an area in which failure and mistakes can have detrimental effects. While some trial-and-error is part of any investor’s journey, this is a space in which children should be provided with important tools and strategies to become responsible young investors. This article covers a few of the strategies you can implement to teach your child about investing that are both constructive and simple.
1. Start with the Basics
Perhaps this first one goes without saying, but it’s important to start with the basics. Some parents find that it helps to begin by explaining the concept of “saving” first, and then progressing to “investing.” Depending on the age of your children and how familiar they are with dealing with money, the approach should be adapted. Covering general concepts, such as setting money aside versus putting it in a place where it can grow, is a good way to instill the basic meaning of “investment,” from which more detailed concepts stem.
2. Set Reasonable Expectations
The idea of setting expectations when teaching kids the basics of investing was discussed in a piece published by Forbes. It is wise to make sure your child knows the benefits of keeping activities involving money simple, rather than striving to be the next Warren Buffet. Many financially secure adults can get carried away when it comes to personal investment, and kids are naturally even more inclined to start dreaming of riches, as opposed to slow and steady gains. For this reason, it is important to introduce simplicity and modesty as core investing principles, setting reasonable expectations at the start of their investing journey. Neither simplicity nor modesty precludes kids from getting more ambitious down the road, if and when they are financially equipped to do so.
3. Emphasize Risk
Emphasizing risk builds on the idea of teaching kids to keep things simple. Kids should specifically understand the risk associated with high-profile investments. A recent publication on investing ABCs for kids used the recent GameStop phenomenon as an example to illustrate why this is important. A lot of young people were intrigued when they saw many other investors make a lot of money on the largely unexpected surge in GameStop’s stock price. It is only natural for kids to chase this kind of exciting opportunity. However, in the case of GameStop, a lot of people also lost money by simply following the trend without thinking rationally about the opportunity. This example is for children who are slightly older and more advanced, but the core concept here is that kids need to understand the delicate balance of risk and reward.
4. Practice Makes Progress
Once you have taught your child the basics, the next step is to enable your child to practice investing. This may mean that you sign them up for a mock-trading platform; you may present them with different stocks or scenarios and follow them together; you may even give them a small amount of money to invest through your own account. Whatever method you decide to pursue, practice is a great way to expose kids to how investing looks and feels like.
5. Explain Brokerages
Brokerages may sound more advanced, especially if you are a parent who doesn’t have a lot of investing expertise. However, this is a necessary point to cover early on in your child’s learning. Today, there are an increasing number of investing apps that encourage people to make quick judgements and perhaps rush into decisions. These apps offer low fees and certain other perks, but they have a reputation for getting young people to invest before they’re fully prepared to. On the other hand, a brokerage account is an established and trustworthy means by which to conduct investments. Teaching your child how brokerage accounts work is a good way to set them on a stable path for their personal investing journey.
6. Differentiate Between Long vs. Short Term
Finally, it is important to teach kids the difference between “long-term investing” and “short-term trading.” The clarification of this difference is crucial for any investor, but it is particularly important for kids because you are helping them to build their investing habits and techniques early. If you teach your child how to build their portfolio for gradual, long-term gains, they will understand the necessity of making decisions for the future, rather than simply to achieve short-term gains that are not sustainable.
There are many concepts that should be taught to kids before they start investing, but these ideas cover a few of the fundamentals that can set them up to understand both the benefits and risks of investing their money.
Author: Jerie Bricks