Thought I’d share something very different today that will affect the next generation. While children may not understand investing in the terms that a sophisticated adult can, there are some simple ways to start getting your children to think about money.
If you begin teaching them early, even as young as 5 years old, you will be giving your child a good start towards a healthy financial future.
Here are 8 steps you can follow to get them started:
Use everyday situations as an opportunity for learning
A great way to help kids understand finances is by using real-life situations. When you eat out, challenge them to figure out the bill before you receive it. Are you going on a family outing to the zoo?
While waiting on line, ask your child whether it would be a better deal to buy a family pass or to buy one ticket for each person. As your child gets older, you can make this more challenging. For example, let them figure out which bank would be best to put their money in, factoring in fees and interest rates.
Use measurement tools
Teaching children to save early on will create habits that will have an impact on them for a lifetime. Get your child a bank or box to hold the allowance they have earned. As they watch the money grow, they will see how rewarding it is to earn their own money and how patience pays off.
You can also have them create a chart on a whiteboard so that they can track their progress. For more advanced children, try offering them an interest rate so they can begin to understand compound returns.
Help your child budget
Give your child a reasonable amount of control over their money. Let them spend some of their allowance or give them a gift card to use and they will begin learning about the value of money and the value of searching for the best deals rather than impulse buying. For an added incentive, let them keep anything that is left over.
Have your child come up with a short-term savings goal (1 month) and then a long-term goal (1 year). A short-term goal will keep kids interested as the reward is within their reach. Seeing the finish line up ahead will keep them moving forward. The longer-term goal will help them stay focused on the larger reward down the road. Make sure that your child sets these goals rather than you. If they set them, they will take more ownership of their success.
Let them be the business moguls
Kids can learn about basic business concepts such as revenue and profits by running a lemonade stand, participating in a garage sale or selling treats at school. eBay can be a great teaching tool as well, because they have to contend with fees and promotional add-ons.
Use rules of thumb as a teaching tool
We have all heard cliché’s such as, History doesn’t repeat but it rhymes, Markets can remain irrational longer than you can remain solvent, and Be fearful when others are greedy and be greedy when others are fearful. There are plenty of books you can find with lots of quotes that may be used to teach your children about good investing practices.
Teach the importance of avoiding speculation
You can teach your kids about the pitfalls of speculation by playing a coin toss game. They will have to pay $1 to get in on the game and if the coin lands on heads, they will win $1.50. It is a good lesson to learn when they are young rather than by gambling with big bucks as an adult.
Invest for real
After you have taught your kids the important lessons above and they have saved enough money, assist them with opening a brokerage account or you can hold a stock or fund for them. If you choose to try the stock, have them pick a company that they are familiar with and utilize regularly.
By doing this, it will make it more real for them. They will understand that a stock is an investment in a real business, not just some ticker symbol. If you decide to go with a fund, you can teach them about expense ratios and the importance of low fees.
Encourage them to invest in a diversified fund or a safe blue chip rather than a more risky investment that could fail and discourage them. However, do not be afraid to let them make some mistakes. They can be valuable learning experiences.