Studies show that there is a significant portion of children in the United States that aren’t aware of the way investments and money works. As children become more aware of money – whether it’s by working or through a regular allowance – it’s vital that you give them as many investment tools as possible. This is knowledge that will last them a lifetime. Your kids need to understand all about risk and reward, and they should learn quite early that a risk is the possibility that the investment will lose some of its value, and the reward is what the investment earns over time.
Collaborative post. Post may contain affiliate links. Disclosure can be viewed here.
When you gradually introduce financial responsibility lessons into your children’s lives, it can make your experience teaching and learning about finances with your children much easier and more fun . They may witness your own investment portfolio when you choose to go through a house sale for family, a home upgrade, or when you’re studying stocks online. So, with all of that in mind, here are ten investment lessons you need to teach your children to help develop good financial habits early on. It doesn’t have to be hard, just start talking and teaching, and it will come.
One of the best things that you can do for your children is to open a savings account with them and get them started early. You can let their cash work for them and teach them the basics of saving money. For example: if you are giving your children $5 a week, teach them to put ⅓ of that amount into their piggy bank. ⅓ for the things they want, ⅓ for the things they need and ⅓ for savings can get them into such good money habits early on.
Don’t Beat The Market
When it comes to schooling, encourage your children to be better than average – to soar. But when it comes to investments, they should want to be as average as possible. Embracing the market instead of racing to beat it can be the best thing that you can teach the kids. Indexing – or passive management – is an approach that matches market performance rather than trying to race ahead and beat it.
Invest In Low-Cost Index Funds
Past performance is not an indication of the returns that you may get in the future, but the most accurate predictor of the future is low fees. Funds that are actively managed have a full percentage point expense ratio, and it’s something you should teach your children to invest in.
Think Long Term
An annual return for the average investor can be in the range of 4% and this is because most of the time, we invest with our emotions and not with logic. It’s what makes us buy high and sell low, instead of the opposite that it could be. Teaching your children not to invest with their emotions is important, because it’s the long term plan and not the daily swings in the market that they should be concentrating on.
One of the smartest strategy that you can teach to your children is not to put all their eggs in one basket when it comes to making their investments. Diversification allows an investor to reduce their risk, and it limits the losses without the risk of sacrificing the gain. Teaching your children that it’s a good idea to look beyond what they know and spread their investment over a range of assets. The overall risk is then lowered, and being able to diversify within each asset type is important.
Get Them Involved
Your children are watching your behaviour, so if they see you making careful financial planning decisions, they will model this behaviour. It shouldn’t surprise you that their saving and investment behaviour will follow yours, which means that any opportunity that you get to involve them in what you’re doing with your investments should be taken. This can help them to form healthy habits with their finances, because they will also start to make good decisions with their own money.
Plan Goals Together
Children love a chart. They especially love a chart if it comes with rewards and stickers, and if you encourage them to write down their savings goals and what they hope to get out of their own investments, you get your teaching moment to help them to budget. When they are old enough to start receiving money, whatever the occasion or reason, start a chart outlining their hopes and dreams about what they want to do with their cash. If you teach them to write down their savings goals, they get something to aim for and they are more likely to hit those targets that they have set for themselves.
Learn By Doing
Whatever you do that involves money, get your children involved, too. These are teaching opportunities for you to work together for them to learn from you. Here are some of the ways that you can get your children to be more involved in the everyday finances.
- When you go out to eat, get the kids to help out with figuring the bill along with the tip. Ask them questions about how they came to their results and get them to help pay the tip, too.
- When their piggy bank is fit to burst, make an appointment with the bank to open up their first savings account. They can deposit their funds and receive their own debit card. Of course, you can hold onto this for other future funds that they want to deposit.
- If you have an item to be returned to a store and you need a refund, get your children to take the lead on it. Allow them to speak to customer services in your place and talk to them about returning the product and getting the refund needed and why. It’s a good way to teach them to be more confident when speaking to people in the service industry.
Give Them Some Control
If you want your children to learn anything about finances, you have to let them learn. As they get older, young adults (think teens!) should be given access to their finances. Yes, it’s a risk that they could want splurge their cash, but the idea is that they can come to you with what they’d like to buy and you get the final say on the purchase itself. Then, they can make mistakes that aren’t going to blow their savings and they get a little wiggle room to make those mistakes.
Teach Rules Of Thumb
Money rules that affect money behaviours are important lessons to learn. Your children need to hear these:
- Always provide an actionable takeaway, allowing your child to learn why they should start early or follow your investment habits.
Once you provide them with the right takeaways, they will be able to succeed financially and you’ll be able to be a big part of setting them up for success.
As part of your parenting journey, you need to teach your children everything that you know about investment and let them be a part of the journey that you are taking. It’s an excellent bonding tool and they can learn so much from you.