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Raising Money-Smart Kids: Dive into the World of Teaching Kids About Investing!

Updated: Dec 2, 2023

In today's world, where financial literacy is crucial for success, teaching kids about investments isn't just a choice; it's an absolute necessity. Shockingly, studies, such as the National Financial Literacy Test conducted by the National Endowment for Financial Education (NEFE), reveal that only 21% of teenagers in the United States grasp fundamental concepts of money management. This alarming statistic underscores the urgent need for parents and educators to step up and equip the next generation of children with the essential tools for a secure financial future.


 

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African American family


Why Teach Kids About Investments?


In today’s world, just being good with cash and saving won’t be enough to keep you afloat through your retirement years; not if current trends continue the way they are. There’s a few reasons for this, but most importantly it would be foolish of us to rely on government funded programs to keep us afloat in our retirement years. While these programs arguably may, or may not, exist when the next generation of kids is set to retire in ~60 years, they also aren’t meant to give enough to individuals to enable a good quality of life. They give just enough to keep people alive in retirement. We want to live better than that, and we want the next generation to live better than that too!


There’s also the issue of inflation reducing the purchasing power of our cash. For instance, in the United States over the last 100+ years, inflation has averaged 3.3%. So if you had been solely saving your cash while working, historically you would have lost 3.3% purchasing power, which can cause incredible issues over a long period of time!


Simple investing solves both of the problems listed above. If we look at roughly the same timer period (last 100 years), the average return of the S&P 500 is 10.53%. The net difference for someone who put their money into the S&P 500 over keeping it in cash being ~+7%.

What does that look like though? Let’s assume we have two investors that work the exact same jobs, make the same amount, and do almost everything the exact same except for keeping their money in different places. Investor A keeps their money in all Cash. Investor B puts their money into the S&P 500. Both investors work a standard 45 year career, and they both put $500 a month away for this entire span.


Investor A, our cash investor, retires at age 65 with $300,000 in the bank. Not bad! But while $300k might seem like a decent amount of money, it doesn’t account for inflation or what the cost of living will be in 2068 (45 years after writing this article). Let’s counter with Investor B, our S&P 500 investor, who at the end of the same period now has a little over $5million in their portfolio! While inflation will also eat into the real-value of that $5million, it will still be enough to retire and live the rest of their life on.


As you can see from this simple example, investing is very important to the long-term financial health of our next generation. The next step is making sure we know how to teach this to our kids and students!



Starting the Investment Conversation: Building Dreams and Investing in Futures


Kids dreaming about future

Initiating conversations about investments with kids can be as magical as painting a picture of their dreams. Begin by encouraging them to imagine their future – a world where they travel to far-off places, pursue exciting careers, and perhaps even build their own treehouse. Use their aspirations as a springboard to discuss the concept of investments. Here's how:

  • Dreaming Big: Sit down with your child and ask them about their dreams. Whether it's becoming an astronaut, owning a pet store, or traveling the world, let their imagination soar.

  • Linking Dreams to Investments: Explain that dreams require planning and resources. Just like building a treehouse needs tools and materials, achieving dreams often requires money. Introduce the idea that investments can be the bridge between their dreams and reality.

  • Investing for Goals: Showcase how investments can help them realize these dreams. Whether it's saving for a dream trip, funding education, or starting a business, investments can grow over time, providing the financial support needed to turn aspirations into achievements.

By framing investments as the means to accomplish their goals, children not only grasp the concept better but also start viewing finances as a tool for crafting the future they've always dreamed of. This approach not only makes the topic more accessible but also instills in them a sense of purpose and responsibility towards their financial journey.



Teaching Investment Basics


Understanding the core terms in the world of investments can be akin to learning the language of opportunity. Parents can empower their children by simplifying these concepts:

  • Stocks: Imagine stocks as owning a tiny share of a beloved toy store or a video game company. Owning stocks means having a piece of the company, just like being a co-owner of a favorite plaything. It's like having a say in what toys the store should sell, and when the store does well, the value of your share goes up, offering more exciting opportunities in the future.

  • Bonds: Now, picture bonds as a special lending adventure. When you buy a bond, it's like lending money to someone – maybe even to the toy store! In return, you receive special IOUs that grow over time. Think of it as helping a friend fix their broken toy, and they promise to give you more toys in return over time. Bonds are like that promise – they grow, providing more toys (money) later on.

  • Mutual Funds / ETFs / Indexes: Now, let's talk about mutual funds. ETFs, and Indexes. Imagine them as magical baskets where professionals gather different toys (stocks and bonds) to help them grow together. These magical baskets help spread the risk, just like having a diverse collection of toys ensures there's always something fun to play with. With mutual funds, experts manage these baskets, making sure they grow and provide even more exciting opportunities for the future.

  • Risk and Return: Picture risk and return as the thrilling twists and turns in a favorite adventure story. The more daring the adventure, the higher the potential rewards! Use a rollercoaster analogy; the scarier (riskier) the ride, the more exciting (profitable) it can be. However, remind them that even the bravest adventurers wear seatbelts (diversification), ensuring safety while enjoying the thrills. This comparison helps kids grasp the idea that managing risks can lead to exciting financial adventures.

  • Compound Interest: Introduce compound interest as the secret ingredient that makes their money grow exponentially. Compare it to planting a magical seed in the ground. The seed (their money) doesn’t just grow; it multiplies over time, creating a forest of opportunities. Show them that even a small tree (initial investment) can sprout countless branches and fruits (additional earnings) through time, emphasizing the importance of patience and consistent savings.

By using these playful yet insightful comparisons, parents can demystify investment jargon, making these crucial concepts not only understandable but also engaging for their children.


Note: While we leave the discussion of the best investing strategies to our peers who focus on teaching Adults about investing, we do want to highlight that we strongly believe in Index/ETF investing due to the reduction in risk. Day trading is equitable to gambling (and has the same addictive qualities), and long-term investing in single companies can still hold high levels of risk. We won’t recommend our favorite Indexes or ETFs, but it’s worth discussing with your child!


Additional Learning: If you want to learn some more terms to teach your kids - check out our article "12 Common Stock Market Terms Explained for Kids".


Hands-on Learning


Kid laughing and reading book

Making learning about investments interactive and exciting is key to nurturing your child's financial acumen. Here are some engaging activities, paired with parent-friendly explanations, to fuel their curiosity:

  • Investment Games: Transform financial education into a thrilling adventure with investment-themed games. These games are like magical quests where your child can explore the world of stocks and bonds, learning how to make decisions that can lead to treasure (profits). Picture it as a journey through a financial kingdom where they learn to choose the best paths, teaching them valuable lessons about investments in a playful and enjoyable manner.

  • Create a Mock Investment Portfolio: Imagine this as building a treasure map to reach their dreams. Help your child create a pretend portfolio, like a map of different lands (stocks and bonds). Regularly tracking their progress is like following the map to find hidden treasures. When they see their 'map' (portfolio) growing, they understand how their choices lead to results, encouraging them to make thoughtful investment decisions

    • We also offer a mock investment portfolio that follows the S&P 500 in the free stuff section of our website. You need to create an account to gain access, which you can do here!

  • Real-Life Examples: Share inspiring tales of young investors who turned their dreams into reality. These real-life heroes started their quests early, much like your child, and achieved amazing feats. Learning about their journeys is like reading an epic adventure story, showing your child that they too can embark on exciting financial quests, no matter how young they are. These stories serve as beacons of hope, inspiring your child to believe in their own potential and encouraging them to set out on their financial adventures with confidence and enthusiasm.



Addressing Common Concerns: Guiding Parents in Their Children's Investment Journey


Parents understandably have concerns about their children venturing into the realm of investments, but with the right approach, these concerns can transform into informed confidence. Here's how I, as your financial advisor, would address your worries:

  • Overcoming Fears: I completely understand your concerns about your child taking financial risks. It's natural to worry about their understanding and decision-making abilities. Think of it as teaching them to swim. At first, it might seem daunting, but with proper guidance and the safety of a supervised environment, they can learn and flourish. By explaining that their investment journey will be accompanied by careful supervision and educational support, your worries about their financial safety can be eased, allowing your child to learn and grow in a secure space.

  • Providing Reassurance: Setting up a controlled environment is key. Consider it as a financial playground where your child can learn, make mistakes, and succeed under watchful eyes. Think of it like training wheels on a bike; they allow your child to learn balance and coordination safely. Encouraging parents to establish small, supervised investment accounts serves as these training wheels. It's a place where your child can experiment, guided by your expertise and wisdom. This approach not only demystifies investments but also nurtures their financial understanding and responsibility. Rest assured, with your active involvement, your child’s financial journey can be an empowering and educational experience.

If you're worried about how to explain the stock market to your kids, you might enjoy our article "7 Simple Ways to Explain the Stock Market to Kids."


Conclusion: Empowering Future Financial Wizards


In today’s rapidly changing financial landscape, imparting sound money management skills to our children isn't just a choice; it's a pressing necessity. The stark statistics, like the alarming fact that only 21% of American teenagers grasp fundamental money management concepts, highlight the urgency for parents and educators to bridge this knowledge gap. Throughout this exploration, we've not only emphasized the crucial need to educate kids about investments but also demonstrated practical and engaging methods to do so.


By nurturing conversations about dreams and investments, simplifying complex terms, and embracing interactive learning activities, we provide children with a solid foundation in financial literacy. Addressing parental concerns with understanding and offering reassurance transforms apprehension into confidence. By cultivating a safe space for our children to learn about investments, we empower them to navigate the financial world with knowledge and confidence. As parents and mentors, our pivotal role lies in guiding the next generation toward a future where financial literacy is not just a skill but a transformative legacy, ensuring they step into adulthood equipped with the wisdom to secure their financial well-being. Together, we embark on this vital journey, nurturing a generation of financially literate and empowered individuals ready to shape their own prosperous futures.


 

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