When it comes to teaching kids about finances, one thing is sure. Most people complain that schools don’t do enough, but children and teenagers should really learn about personal finance at home. A few well-placed discussions can go a long way to ensuring that today’s kids will be prepared to save and invest in the future.
There’s no need to try and get a child to understand complex ideas like hedge funds or the difference between a mutual fund and an ETF. What is important is getting children to understand that investing means using money to make more money. Additionally, it’s a good idea to help them comprehend that buying a share of stock is purchasing a small ownership interest in a company.
Learn by Doing
One of the best ways to help others learn is having them do. When it comes to investing, a parent might buy a share of a handful of companies a child might find interesting. This could be companies like McDonald’s or Disney that are popular with young people. A child could check the ticker online or in the morning paper, and he or she could learn about the dividends and how reinvestment could cause those dividends to grow over time.
Another option for having children learn by doing is setting up a hypothetical portfolio. It might be a good idea to have them choose a few companies to track. A parent could track this portfolio with the child and then compare it to a leading index fund. This could also be a great way for children to learn about investing through doing.
Teach About Compound Interest
The most powerful force in the financial universe is the concept of compound interest. Kids should learn that interest can work for them or against them. Showing them a chart that shows the impact of starting to invest early and then allowing the investments to compound could be a great way to pique their interest. Additionally, it’s a good idea to show them that making interest payments to a lender could negatively impact their financial future.
Getting an early start in teaching kids about investing is key. The earlier they start investing, the more likely they will be to build wealth. They may not listen, but at least they’ll have the information.