Many parents are thinking about financial literacy in a new light. Money has always been complicated, but the world of digital transactions and ready credit has made it even more so. But because there are few required personal finance classes in schools, it’s largely up to parents to help their kids become money savvy.
Policymakers and educators talk about improving financial literacy for kids, but so far few states seem ready to do much about it. According to the Council for Economic Education’s 2022 “Survey of States,” only 23 states require high school students to take a personal finance class — an increase of just 2 states since 2020.
So parents, it’s up to you. You can set your kids on the right path by teaching them the investment basics you wish you’d learned when you were young. Here are some actionable, age-appropriate tips for teaching your kids about investing.
Set the Stage: From Saving to Investing
If your children have their own savings accounts, or even a piggy bank, you’re off to a good start. But at some point, you can start introducing more advanced financial topics (with examples whenever possible). Every kid is different, so you’ll have to gauge your children’s interest and comprehension. These are some concepts to discuss.
💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
Risk vs Reward
Conventional wisdom says that the riskier the investment, the higher the payout. But the opposite is also true. The riskier the investment, the more you can lose.
Explain to kids that unlike a savings account, which is safe but grows money slowly, an investment account usually carries more risk, so it may grow faster but it also may lose money.
Even a young child should be able to understand diversification by the phrase “Don’t put all your eggs in one basket.” When talking to older kids, you can give examples of different types of investments — stocks, bonds, mutual funds, real estate and other investments — and explain the role each might play in a portfolio.
Supply and Demand
The stock market is generally driven by supply and demand. If more investors demand to own stocks, the market rises. If there are more sellers than buyers, the market falls. As an example, you might be able to talk about how the price of a hard-to get toy drops over time, or how clothes get cheaper when they’re out of season.
If you have children who love to look up things online, why not make the most of that interest and skill set? Ask them about the companies they think might be a good investment, and then check out the reality. (Some of their favorite brands may be privately traded, so that’s another conversation you can have.)
Older kids can look for news stories that summarize analysts’ reports on Google Finance, Yahoo Finance, or MarketWatch, where the writers typically decipher analysts’ jargon.
Gaming & the Market
Another way to get older kids interested in investing? Let them learn and practice trading with an online game or app. There are many options out there, including animated games that give kids a goal and ask them to make investment choices about getting there.
Play Follow the Market
Once your kids understand a little bit about how the stock market works, you can begin following the markets together and track how they’d do if they were actually invested in a particular stock, for example. Older kids might like to create an online watch list of their favorites on finance sites where they can watch market movements without risking actual cash.
Go Buy the Book
It might sound like a pretty old-school way to explain investing to kids, but there are books out there that include plenty of illustrations, fun language, and important lessons, including these:
What All Kids (and Adults Too) Should Know About … Savings and Investing, by Rob Pivnick, covers saving, budgeting and investing.
Go! Stock! Go!: A Stock Market Guide for Enterprising Children and Their Curious Parents, by Bennett Zimmerman, follows the Johnson family as they learn the fundamentals of stocks and bonds, the mechanics of investing, and the ups and downs of risk and reward.
I’m a Shareholder Kit: The Basics About Stocks — For Kids/Teens, by Rick Roman, is a spiral-bound book that was last updated in May 2018 and is designed to appeal to kids who want to know about investing and managing their money.
Make It Real with a Custodial Account
If you want to give kids a taste of what investing is like, you can open a custodial account and either make some picks yourself or let your children do the choosing.
Custodial accounts give kids financial visibility but limited responsibility because they are not allowed access to the account’s money or assets. In almost all cases, the parent is responsible for managing the money until their child reaches adulthood.
Many discount brokers offer investment accounts for kids online. Some brokers have also introduced hybrid products for teens that allow them to save money, spend, and invest all in one place with the supervision of their parents.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
What to Invest in
One way to make the lesson more meaningful might be to think about the things that are important to the kids at each stage of life and pick a stock that represents it. (The company that makes their favorite snacks, for example, a top toy brand, or a clothing label.)
As your children get older, they can have more input, and you can talk about how dividends work, the power of compounding returns, and what it means to buy and hold. If your kiddos can’t decide between two companies, they can work together to research the better choice.
Recommended: What Does Buy & Hold Mean?
It’s important to note that there are pros and cons to creating investing portfolios for minors, so you’ll likely want to check out any consequences related to future taxes and when the child applies for financial aid for college.
Grow Their Interest with Compound Interest
Want to show your kids the magic of compounding interest? The Compound Interest Calculator on the Securities and Exchange Commission’s Investor.gov website is easy to use and understand. Just plug in an initial amount, how much you expect to add each month, and the interest rate you expect to earn. The calculator will chart out an estimate of how much your child’s initial deposit would grow over time.
To take it a step further, you can teach your children to use the “Rule of 72” to compare different types of investments. According to this rule, money doubles at a rate where 72 is divided by the percentage gain. So, if your child is looking at an investment that makes 4% annually, it will double in 18 years, or 72 divided by 4.
Share Your Own Family’s Adventures in Investing
Whether it’s a success story or a cautionary tale, kids can learn a lot from their family history.
For example, in a conversation about the value of investing and goal-setting, you could talk about how your parents and grandparents made and saved their money vs. how it’s done today.
Focus on storytelling instead of lecturing, and encourage questions to keep kids involved.
There are many ways to introduce kids of all ages to the concept of investing. The simplest one is to share with them your own investing history and perspectives. Beyond that, use websites, videos, books and other tools — including a custodial account, if you want — to illustrate the how-tos, dos, and don’ts of investing.
Keep it fun, and don’t forget to share some of your own goals and financial plans with your kids. Kids learn by participating in real life. Someday your adult children might be telling tales around the dinner table about how your lessons helped advance their financial savvy.
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