As parents, it’s our job to ensure that our children are prepared for the real world. With that being said, it’s important to teach your children about the power of saving and the value of investing. Without this knowledge, your children will likely have a harder time building a solid financial foundation.
When it comes to investing as a child, there are major benefits. Unlike adults, kids have plenty of time—and in this case, time literally is money. Compound interest over time is a sure fire way to create wealth and help your child’s investment grow. Other benefits include:
Disposable income: Whatever amount of money that children earn—whether it is from doing chores, birthdays or holidays—is likely to be 100% disposable. That means they can invest each and every dollar if they wanted. However, even a portion of the money they earn is a good starting point.
Automatic investments: Having your children invest just a few dollars a week could result in amazing savings. For instance, if your child invests $2/day for 21 years and it is compounded monthly at 8%, they will have $39,282 by the end of the 21st year. Most of the money up to that point was primarily disposable income, which is even more amazing.
In order to fully prepare your child for financial stability, you must help them to truly understand financial concepts and how to put them into action.
Start with saving. Teaching your kids the benefits of saving early on will help them be better at it as adults. It shows them how they can build wealth through long-term investments rather than simply spending it immediately.
Keep it simple. It’s best to avoid lengthy, technical discussions about the stock market and stick to more simple topics. Explain the difference between short- and long-term financial goals, and between saving and investing, in terms they can relate to.
Make it real. Open a real investment account for your children and have them make deposits and keep track of the performance. Although they won’t be able to do this completely by themselves, it will give them some sense of financial independence and show them cause and effect.
Make it relevant. Start looking at stocks that might peek your child’s interest. For example, if your child is a huge athlete then look into getting them stock in Nike or if they are into social media then Facebook might be a good stock to purchase. Anything to keep them interested.
Match them. For an extra incentive to invest, offer to match whatever amount they decide to put aside. They may be more excited to invest their allowance if they know it is actually going to be doubled. And learning not to leave matching money on the table is an important skill for future 401(k) holders.