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Tips for Teaching Your Children About Money

April 20, 2020

Presented by: Commonwealth Financial Network


Do your children act like money grows on trees? If they observe you effortlessly pulling out the credit card for every purchase or they play video games where they can buy accessories for avatars, it’s understandable why they hold onto that cliché. This can lead them to believe they can buy whatever they want without ever paying for it—just a wave of a plastic card and it’s theirs. So, when the time comes to teach your kids how to handle their own money, you’ll want to lean on some best practices.

Meet Them at Their Level
There really is no right or wrong age to teach your children about financial matters. Like most aspects of parenting, it may be based simply on a feeling about their actual readiness for something. One of the most important parts of teaching kids about money is to keep it simple but also to realize that, like investing, it is a long-term process. Keeping it simple means no big terms or concepts for them to comprehend. You don’t want to do a deep dive on option strategies for making money on the volatility of the Hang Seng stock market!

Aid Learning with Visual Examples
Everyone can envision a bucket—that’s why this strategy can be an easy one for your kids to grasp. Explain that they should divide their money into four distinct buckets: one for spending, one for saving, one for investing, and one for charity. After they bucketed their monies, you could explain the concept of opportunity cost. In other words, if they choose to spend all their money, they would have none left for the other three buckets. Some kids won’t care about that fact at all; however, that could change once they understand the power of compounding.

One of the best ways to illustrate the concept of compounding comes from how Kevin O’Leary (aka Mr. Wonderful from the TV show Shark Tank) taught his kids about its power. He gave each of his kids a glass piggy bank to store their money. Each night while they slept, he would slip a few extra pennies into each one. When they woke up, they could see that they were making extra money while they slept. Warren Buffett explained the power of compounding as “being at the top of a very large hill with wet snow and starting with a snowball and getting it rolling downhill.”

Give a Vocab Lesson
A few terms can help kids’ understanding of money. For example, you could say “buying a stock” means that they owned a piece of that company. If that company did well, then generally that stock would do well and make money for them. You could further explain that “investing” some of their monies would be a means of using their money to make more money. Finally, you could touch upon “risk” and “reward,” including how they are related. That is, if they invest their money, there is a risk that they may lose money, but taking on that risk is necessary to reap a possible reward of making more money on their stock picks.

Use Real-Life Stories
Many kids learn best when the concepts are applied in real life, as well as when the learning experience is fun and interesting. Games are a valuable resource for this effort. Virtual stock market games can aid the lesson where each child can choose a company to invest in (without using real money). Help your children make a choice based on their favorite hobbies or interests; it’s important to choose companies that they can relate to so that they will be more interested in the results of the game. Also, individual stocks are probably easier for them to get excited about, understand, and track than mutual funds or exchange-traded funds. Throw in the natural sibling rivalry and it becomes game on! Consider using a spreadsheet to track each stock pick’s performance. There are apps out there that can do the same (e.g., InvestingNote and Stocks Live).

In addition to this game, occasionally slip in a bit of TV news on the markets  with your children or bring them into discussions about specific stocks or companies, as well as reasons why the markets were up or down on a given day. Other teachable moments involve discussing investments in your 401(k) plans and sharing stories about stocks that you bought in years past and how those investments turned out. No, we’re not suggesting putting them to bed by regaling them with investing lessons from Warren Buffett!

Once you feel comfortable with your children’s level of investing knowledge, it is time for them to invest for real. There are a few ways for kids to do so. One way is to gift them shares of stock. There are companies that will help with this and even send a framed stock certificate to the recipient. Another option is through an app called BusyKid, which allows kids to use their allowance money to purchase shares of stock. An app called Stockpile allows users to purchase fractional shares of stock, which makes it much more feasible to buy some ownership in well-known companies.

Prepare Your Kids for the Future
Learning usually requires some sort of grade, but this is the kind of learning that is ongoing. It will be a work in progress as you look for opportunities to educate your children and loop them in about market changes and perhaps your own decisions about money. Look at it as a subject that will require many more years of teaching and learning. Ideally, by learning about investing now, your children will be prepared to make better money decisions in the future.