It’s a universal truth of parenthood that some of the things you’re passionate about will bore your kids to tears. You might be fascinated by the power of compound interest, but to your kids, the concept is probably as disinteresting as U.S. tax code. Too bad: Teaching kids about financial responsibility is one of the biggest gifts you can give them at any age. Whether your child still needs help tying their shoes or is on the verge of adulthood, the right time to start talking about investing and saving is right now.
Young Children
Parents have a lot of influence over the financial decisions of their young kids. You might already be teaching them about investing and saving in little ways every day, like by urging them to put birthday money in a piggy bank instead of using it to buy candy. You can talk about how to divide money between pots for saving and spending, and talk about how that saved money might come in useful in the future. At this stage, it makes sense to illustrate the reasons to save and invest money using age-appropriate stories rather than relying on numbers alone.
You may also want to involve kids in the growth of their own accounts. If you’ve established 529 plans or other accounts to save for kids’ future educational needs, consider showing them their balances. Talk about how much of that money comes from interest, and how much it could grow into over the next decade. You might even talk about the fact that it can be tempting to take that money out to spend it on things right now, and the benefits of resisting that temptation and letting the money continue to grow.
Another potential strategy prepares kids to take advantage of 401k matching opportunities. If you’re willing to contribute to your child’s savings, offer to match their earnings dollar for dollar. When they save $100, you can explain, you’ll contribute $100 of your own. The promise of “free” money could be enough to spur kids to voluntarily save their allowances rather than spending them. (Matching their cash will teach young kids an indelible lesson about the power of saving, but this strategy can be deployed at any age – and might be especially effective with older kids who are preparing to enter the workforce, where they can actually take advantage of 401k matching.)
Tweens and Young Teens
By the time they’re in middle school, kids should understand enough about money to be able to see the value in investing. This could be the perfect time to involve your kids in making their own investments. One option is to give them an overview of your own portfolio. To the extent you’re willing, discuss why you have the investments you have, how to balance risk with reward and the factors that contribute to the stock market’s performance. Show them how to track a stock’s progress, too. Then let kids pick a company or two to invest in. Purchase a few shares for your own portfolio so you and your kids can track them together, or give them a pretend budget that they can use to put together a fantasy portfolio. If they choose well, watching their (virtual) money grow could be a strong motivator to invest for real in the future.
Even if you’re not willing or able to help your child choose stocks, you have many opportunities to help them get hands-on experience with investing. Apps and computer games can be a big asset here. The Stock Market Game, for example, is a virtual online stock market simulation that’s designed for students in grades 4 through 12. Experiment with it and other investment games and apps to find options that suit your child’s age and learning style.
Young Adults
When kids reach 15 or 16, it’s a good time to start talking about the options and responsibilities that come with regular paychecks. Making sure they understand how compound interest works could be one of the most powerful and lasting lessons you impart. You might wait until a teen gets their first paycheck and use a compound interest calculator to demonstrate how much money that check could be worth in five or 10 years’ time. Teens can play around with these calculators to figure out how much interest they could earn by the time they’re 21, or 25, or 30.
Beyond demonstrating basic concepts, there are plenty of ways to nudge young adults to build healthy financial habits. Help them compare the interest rates for savings and money market accounts, and the interest rates for credit cards. Talk about how college students and young adults often accrue credit card debt and how to avoid that. When your kids turn 18, help them invest a little of their own cash in an investment portfolio so they can start to turn practice into reality.
When you’re thinking about financial security, your family’s well-being is a top motivator. At Sachetta, we understand that being able to take care of your loved ones is everything, and we want to help you do just that. How can Sachetta help you make fully-formed decisions about your family’s financial future? Contact us with questions.