Are you looking for a way to teach money and investing skills to your kids? Investing for kids is an important step for helping them to achieve financial literacy and eventually financial independence.
Should we teach our kids to invest in a volatile market?
Fidelity recently published some very abysmal numbers in regard to younger millennials investing for their futures. 55% of those surveyed said they put their retirement savings on hold during the pandemic. 45% of young people don’t see a point in investing until things return to normal.
This is absolutely devastating. It should make every parent examine what habits they are instilling in their children around savings and retirement. For beginners, there is one simple rule when it comes to saving for retirement. Start early. The fact that such a high percentage of the Next Gen doesn’t see a point in saving until things return to normal betrays a deficit in their education. No matter what the market is doing, we need to help our kids get started with investing as young as possible.
How Should We Teach Kids to Invest?
This question has gotten more attention recently with the advent of platforms that allow everyone to directly invest in stocks. Even several kids’ platforms allow users to pick specific stocks for investment. There is also a push to get kids interested in and investing in cryptocurrencies. FoxBusiness recently reported that Jay Z and Jack Dorsey recently announced that they are teaming up to launch “Bitcoin Academy” which will teach kids about money, cryptocurrency, blockchain, and avoiding scams.
Teaching kids to be financially literate and understand money, markets, investment tools, and stocks is always a good thing. Getting kids interested in and curious about money is the first step towards a more financially literate society. Money has been taboo for far too long, and all we have to show for it is generations of financially illiterate Americans.
But before you jump into teaching your kids about NFTs and the latest hot stocks and cryptos, there are foundations that need to be laid.
Financial FUNdamentals, from 0-7 in the Blink of an Eye
Financial habits are set by age 7. Most financial literacy in this country starts much too late to generate lifelong habits. If you start early they will reap the rewards for life.
Needs v. Wants
There is only one thing kids aged 0-7 can effectively pick, and it’s not individual stocks. Before you get excited about letting your child put your hard-earned money to work betting on the creator of their favorite animated series, take a step back and ask yourself if your child even knows what money is.
These early years are the most important for building habits. What are the financial habits that help kids grow into successful adults? Earning and saving. This isn’t nearly as exciting as betting on stocks, but they won’t have any money in the future to invest if they don’t learn these fundamentals early.
When your children are very young they are taking their cues from you. They watch more than they listen. Set the tone of your financial values by living those values out loud. They will watch how you earn, spend and save, and those habits will take root before they can even earn their first dollar.
When you don’t buy your child all of the items that stores place at their eye level right before check-out, use that opportunity to explain why not. These are ideal opportunities to teach kids the differences between needs v. wants. They may want a Twix bar, Nerd Rope, and plastic toy, but they don’t need them. This one lesson, parroted over and over, is one of the basic lessons of personal finance, and your child can learn it before they ride a bike.
Now that you’ve deprived your child of sweet, sweet sugar and plastic, it’s time to teach them that if they really want those things (note, they still don’t need them), they will have to earn them. This is the ideal time to nip all of the “I wants” in the bud, and replace them with “I want to earn.”
We created a very simple and fun way to introduce earning to little kids with our financial literacy App. It allows you to take a picture of whatever it is your child wants to earn, and the App turns it into a puzzle and breaks it up into however many pieces you want. Each piece is a task or chore you assign, and your child can earn whatever they want piece by piece.
Whether you use the Nest Egg App or another method, it’s important and possible to engrain the desire to earn from a young age. This is truly where financial literacy can be fun. It should be fun and satisfying for kids to earn things that they want. Whether through puzzles or other methods of gamification, make this process fun and rewarding for your child.
Finally, when your child has started earning the things they want, you can introduce the idea of saving. Eventually, your little one will get more sophisticated wants – they will graduate from the candy bar to a set of Legos.
This is actually a good thing because it allows you to introduce the idea of goal setting and saving into their heads. It takes a little longer to earn the Lego set than it does to earn the Twix bar, so let’s start saving for the Lego set. Our App, along with many others, will allow your child to set a savings goal and even make automatic incremental deposits towards that goal over time. When the goal is met, the Legos are purchased.
And just like that, you’ve used the better part of your child’s first decade to introduce, practice and reinforce the most important financial principle that will set them up for success – learning to earn and save.
Investing Basics from 8-12
Kids in this age range want so badly to grow up. This is an ideal time to capitalize on that desire with the introduction of more adult financial concepts.
There are many ways to invest, and all have their benefits and drawbacks. Once a child has learned what money is, understands their needs v. wants and is willing to earn and save, it’s time to start teaching them about investment.
One of the first lessons in their investment journey should involve the two words no child should enter their teen years without understanding: compound interest. Once called the eighth wonder of the world by Albert Einstein, compound interest is the sole reason most people can retire. Conversely, it is the sole reason some people can never retire.
Even young kids will be excited by the idea that their money can make more money, and should be terrified at paying twice the cost on a high-interest credit card. It is again a concept you can use an App to teach since many allow you to set up parent-paid interest payments on your child’s savings account.
It shouldn’t be hard to get your child excited about the fact that they can make money just by not spending money. This incremental saving and growing is a core habit of successful investors, and it doesn’t take a stock genius to earn money over time this way.
Now is an ideal time to introduce your child to interest, compound interest, credit cards, car loans, and mortgage calculators. Kids really enjoy playing with these calculators and there is an abundance online.
This is a great way to generate excitement about earning interest and terror about paying interest. Win-win.
Side note: according to Ramsey Solutions, over 80% of graduating college seniors have credit card debt before they have a job. When you teach about compound interest, make sure to teach about both sides of that equation.
Individual Stocks and Cryptocurrencies
In June of 2020, Christine Benz, the Director of Personal Finance and Investment at Morningstar, sent the Twittersphere into a frenzy with a tweet that can be trotted out every few years to serve as a warning.
“I’ll say it: Individual stocks are TERRIBLE investments for people just starting out. I know that many people learned about investing through their Disney shares yadda yadda but I think we need to be clearer about this when we discuss financial education.”Christine Benz, Director of Personal Finance and Investment – Morning Star
She discussed this further and soon wrote an article on Monringstar.ca elaborating, but her simple point should be taken to heart by financial educators. We need to teach kids about stocks and the market while simultaneously tempering their expectations about stocks and the market.
We watched advertisements over the last few years in the financial literacy space shift from a message of slowly growing savings over time to letting kids pick their individual stocks. Unless a parent has both the time and expertise to teach a child how to pick an individual stock, it is a lesson that should be given more with an eye towards education than towards actually making money.
An Incremental Approach
That is, it should be a very small investment that is watched very closely as an educational opportunity. And even then, as Christine Benz would later point out, it is worth noting that the small amount of money a child could lose might be better invested in a mutual fund with a track record of slow and steady growth over time.
As you are teaching children about individual stocks and cryptocurrencies, two vehicles that have been very volatile lately, keep in mind that kids live with their hearts on their sleeves.
They might learn the wrong lesson from sharp rises and be overly disheartened by steep losses. And this brings us back to the initial stat about Next Gen investors, specifically that 45% do not see a point in saving until “things return to normal.” This 45% learned the wrong lesson growing up.
Saving is not something we should do only when stocks are rising. Saving is not something we should do only when stocks are falling. There is no “normal” which should prompt saving.
Saving should be a habit and continues through rises and falls, bulls, and bears.
We cannot let the Alpha generation make the same mistake when they encounter the exact same cyclical ups and downs as the young Millennials.
So absolutely teach 8-10-year-olds about individual stocks, how the market works, and cryptos, but do so while simultaneously setting appropriate expectations of investing in individual stocks and nontraditional currencies.
Real Money Teens
This brings us to the teenage years. If you started your child’s financial education when they were born, then this is the time to let them put their lessons into practice. I did not learn those lessons as a child. But I had a close friend who did learn those lessons and the differences was noticable.
In my teen years I was spending every dollar I earned at the Gap.
However, my friend was setting aside 30% of his money into a total stock market index fund. He spent his teens continuing the lessons of his early childhood and starting to build some actual savings.
CNBC recently reported that more than half of Americans have less than 3 months’ worth of emergency savings. If you do a good job of instilling solid financial values in your child – earning, saving, investing – then your child could build that 3-month runway in their teens and watch it grow into actual retirement funds by their 60s.
Implementing a Plan and Reinforcing Past Lessons
Plenty of parents push their teens into summer jobs to learn valuable lessons about working and earning, but without the foundational values of budgeting, saving, and investing, none of that hard-earned summer money gets saved. The teens should be safe years for a child to start practicing good money habits.
Work with your teen on a classic 50/30/20 budget. 50% of their income goes to essentials (rent is probably low, but car insurance can be brutal), 30% towards saving and investing, and 20% to non-essential lifestyle choices.
The needs v. wants lessons you worked so hard to teach before they were 7 will come full circle and incorporate nicely into their budgeting choices. If they are putting away 30% of the money they make slinging popcorn at the theater, then chances are good that they’ll continue that practice as their salaries increase.
If your child is interested in stocks and cryptos, they can continue to study and learn during these teen years. They will have had the benefit of learning about the markets as a young child and can now start to understand the nuances, benefits, and pitfalls of individual stocks. They will be wary of anything that promises easy riches and dismissive of anything with a return under the market average.
And just like that, you’ve raised an investment-savvy child into adulthood. Lessons on earning have motivated your child into a good job. Their habit of saving means that 20-30% of their earnings are going towards the future.
Their knowledge of markets allows them to choose long and short-term strategies to meet their goals. Their fear of paying compound interest has kept them in the meager 20% of graduating college seniors without a credit card.
Their budgeting and restraint in their teens have made them some of the younger Americans who count themselves in the 39% who have enough funds to cover a $1000 emergency. All of the lessons from childhood applied effectively as an adult, set your child up for financial success.
No one said raising kids was easy. NO ONE. Just keeping them safe, bathed, and fed can be a challenge. But it’s not enough to raise an adult who regularly bathes.
We need to raise adults who don’t quit saving the second the market dives. By the time kids start learning the anemic lessons schools teach about investing, it’s too late. Their habits and foundational knowledge should have been fostered through years of hands-on lessons and dinner table discussions.
It takes time, effort, and consistency, but it is infinitely possible to raise a financially literate child. Apps, calculators, and easy access to investment accounts are all tools that can make it easier for parents to raise the next generation of smart investors.