5 Ways To Teach Kids About Investing

By Amy Fontinelle | July 27, 2009 AAA

Offering lessons about investing to your child at a young age makes it a familiar concept and regular part of life, instead of something scary that they won't want or know how to deal with in their later years. There are as many ways to help your kids become comfortable with the idea of investing as there are G.I. Joe figures and Barbie dolls to buy, but here are a few ideas to get you started.

No.1 - Teach Kids to Save
If you don't save first, you won't have any money to invest. What's more, as an adult, you know that you should have plenty of money in an easily accessible savings account for emergencies before you do much investing. That's why it makes sense to teach kids about savings accounts before you teach them about stocks.

Many personal finance experts recommend that you have your kids save 10% of their gift money, allowance money, and whatever other money they receive. While this advice may be analogous with the adult rule of saving 10% of your income, consider teaching your children to save more. Otherwise, since kids don't usually have to pay for their necessities, you're unwittingly teaching them that it's OK to spend 90% of what they bring in on toys. If you teach them to save more, they learn that when expenses are low, it's wise to save extra so you can use it for something more important later. (Learn to steer clear of financial potholes at a young age in 5 Common Mistakes Young Investors Make.)

No.2 - Teach Them About Credit Card Debt
Consumer debt is one of the biggest barriers to investment for many people, because they are saddled by monthly debt payments instead of having that extra money to save or invest every month. When they have emergencies, they have no savings to fall back on, and they go further into credit card debt and further from the kind of financial security that sound investments can bring. When you make purchases with plastic, explain to your child that you have to pay for that purchase as soon as the bill is due, and that there are serious consequences for not doing so. This is also a great time to teach them about interest - how it's good when you're earning it, bad when you're paying it, and how it compounds.

No.3 - Teach Your Child how to Set Up a Simulated Portfolio Online
This way, he or she can learn about investing without the risk of putting actual money into play. If each member of the family sets up a simulated portfolio, you can turn it into a game and create an opportunity for everyone to discuss how they chose their investments, how they performed and why. This is also a great opportunity to teach kids about the different kinds of investments available, and the potential risks and rewards associated with each.

Of course, you don't want your kids to think investing is just a game with play money. Once they understand how it works, have them invest a portion of their real-life savings so the profits and losses become tangible. Don't worry if they make mistakes, just be glad that they're learning now so they don't make those mistakes when more money is at stake and their time horizon for recovery is shorter. (Learn to use the power of compounding - not pennypinching - to profit in Young Investors: What Are You Waiting For?)

No.4 - Set Working Children Up with Retirement Accounts as Soon as They are Eligible
Everyone who has ever picked up a personal finance book to learn about investing for retirement wishes they had started earlier, as soon as they see those compound interest charts. Do your child a favor and let them be one of the lucky few whose stomach doesn't start to churn when they get to that page in the book. Even saving and investing small amounts of money makes a big difference, when you start young. It also starts an important habit at a young age, and teaches them to stick with it through times of financial hardship (like paying for college or being between college and that first full-time job).

No.5 - Don't Stop Teaching Your Kids About Money, Ever
They can use your advice at all stages of life. Once they've left the nest, they'll have questions about things like company retirement plans, buying a house and saving for your grandkids' college educations. If you've been through these things before, you can make life easier for your kids by passing on your wisdom. Even if you can't answer all their questions, you can offer your support and suggest they pick up some books on the topic.

Parents want their kids to live at least as well as they do, if not better. Remember that even if you don't have much money to give your kids, it's OK. In fact, even if you have piles of money, sharing it with your children will be useless to them in the long run if they don't know how to manage it. Give your kids the gift of investment knowledge, on the other hand, and they'll be on the right track to living a comfortable and perhaps even abundant life.

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