It’s a tough old world out there when it comes to finances and so it’s never too early to teach your children how to think about money, how to invest and how to look after what they’ve already got.
Financial acumen is a vital life skill – even if your children don’t want to go into banking or finance eventually – because they need to earn money and to make the most of what they earn.
Finance is taught at home
Not all schools teach financial literacy so kids can leave college without gaining a solid understanding of compound interest, investing, credit, savings and so on. As parents, it’s up to you to model good financial behaviour and to impart those important lessons, right from the first piggy bank up to their first visit to this website to buy silver coins.
Here’s what else you can do
Pay interest from the bank of mom and dad
The fundamental principle of investing is that it makes your money grow. However, we’re in a serious low interest era right now, so that 0.02% interest rate on Jimmy’s first savings account really isn’t going to spark much enthusiasm.
There are some online banks that let parents or other relatives tack on their own interest rates to the children’s savings. It’s best to go as high as you can reasonably afford – 5% or so – so that at the end of the year, that $100 Christmas gift is now worth $105. After another year, it’s worth $110.25 and so on. Ten years down the line, that $100, thanks to compound interest, is worth $162.89.
If your kids are ever tempted to withdraw their savings, use a compound interest calculator to show them how much less return they’ll get and then get them to wash the car instead!
Give them stocks giftcards
These giftcards allow your children to buy some basic stocks in a company they’re especially fond of, like their favourite toy manufacturer. Talking about their favourite restaurant or toymaker is an easy way to start the conversation about businesses because they’re already familiar with the way they work. From this basis you can bring in concepts like profits, shareholders and loyalty and why someone might want to invest money in a particular brand.
Most giftcards let children buy fractional shares in companies and brands – most of these systems have more than 1,000 to choose from. What’s great about this approach is that they can learn about diversification. With each new giftcard you should encourage them to buy a different stock; if one falls hugely, the others keep the portfolio afloat.
Let your teens loose on a lump sum
If you can, give your kids $500 or $1,000 to invest. They can invest it in whatever they want, but it has to stay there for at least five years so that they see an entire economic cycle. Choosing stocks and watching them each day is easy – it’s understanding the longer, deeper cycles that’s the real challenge. It’s this lesson that’s the most important, though. Thinking in the long-term is how people build up a decent college and retirement fund, which is what it’s all about.