This article was last updated on February 24
How many times have you looked back on life and wished that you had started investing earlier? Teaching your children, or grandchildren, a few simple lessons about saving and investing can start them off in the right direction toward an informed and more secure financial future.
Step 1: The value of savings
Teaching your children about saving money for a specific purpose is key to instilling good investment habits for the future. The lesson is a simple one – if you want something, you have to save your money for it. Talk to your children to find out what it is that they want (chances are they’ve already told you this during your last trip to the mall). Once you know what it is and how much it will cost, work with your children on how they can save for it by using their allowance or money earned from other chores/activities. Give your children options for reaching their goals, such as saving all of their allowance for a certain number of weeks vs. saving half of their allowance for twice as long. This teaches your children to view their options and make informed decisions about how to manage their money.
Step 2: The value of investing
Once your children have learned how to save money to achieve their goals, it’s time to teach them how to earn money through interest accumulation. Learning about the benefits of compound interest is important in children’s understanding of the time value of money. This is one of the most fundamental benefits of regular and long term investing. It’s now time to put principle into practice. A good first step in moving from the “piggy bank” (home savings) to the investment (stock) markets is a simple high yield savings account where they can check their growing balances online. As your children’s savings grow with money from paper routes, baby sitting, or other first jobs, you may want to introduce them to other investment vehicles, such as mutual funds.
Tip: A great way to encourage your children to invest more of their savings is through a matching program, where for every dollar they invest, you match it with a dollar of your own.
Step 3: Stay involved in the process
Most children look to their parents as a primary source of financial information. This makes it important for you to stay involved with your children throughout their learning experience with investments. Take the time to go over your children’s bank or fund statements with them. If they are investing in a mutual fund, show them how to regularly look up the value of their funds on the Internet. Talk to them about your investment history and what you have learnt. Get your children interested in their investments at an early age, and it will stick with them for life.
Last but not least, practice what you preach. You can talk to your children about investing until you’re blue in the face, but chances are good that they will not pay close attention to the subject unless they see that you are following your own advice.