Your Investing Life: Teaching kids about money
April 24, 2014
You get the importance of helping kids develop good money management skills. After all, it's far easier to start and build on a solid foundation of finances than to try and recover from a rocky one. But what can you do to lay down that knowledge base and create habits that can foster financial success? Here are a few suggestions.
Start talking when kids are young
You may imagine money conversations with your kids as being awkward to initiate or uncomfortable to hold. But they don't have to be—especially when you start having them at an early age. Here are a few examples:
- A trip to the grocery store with your preschooler is an opportunity to talk about how much things cost, how to make good spending choices, and how to hold to your budget.
- A purchase made with a credit or debit card swipe can lead to an explanation that you have to pay the credit card company back or have enough in your account to cover the expense.
- A card with a birthday gift can trigger a discussion about saving, as well as spending, the windfall.
- A drive around a pothole can start a conversation about how taxes we pay are used to repair roads, as well as other public services.
Be ready to answer questions. You may have to overcome some resistance within yourself. You'll also want to be careful not to give younger children too much detail too soon or share information that could create some feelings of anxiety. But getting in the habit of talking about money early lets you give your child a good base of knowledge and can help make those more complex conversations that come later easier.
Give kids hands-on experience with money
There are a variety of ways you can let your kids get some practical experience with money management.
One method many parents use is giving their children an allowance. A good age to start is around five. Have your child save at least a third of the allowance, whether into a piggy bank or a savings account. Lifting that bank as it fills or watching the balance number get bigger gives your child a feeling of accomplishment, while you're instilling what will hopefully be a lifelong habit. And the thought of parting with money that's theirs can help kids control impulse-spending requests.
Some families empty their loose change into a big container. Kids like to watch the coins pile up and then help with sorting and wrapping. You can add up the rolls with your child and discuss how much to save and how much to spend. Your child can even help pick out a family treat to buy with your loose-change windfall.
Many schools offer classes that help children develop good financial management skills. Programs like Vanguard's My Classroom Economy, which schools can use at no cost, teach children from kindergarten through 12th grade financial and economic principles appropriate for their ages and give them an opportunity to put those concepts into practice.
"Teaching kids good habits related to money is critical to their future financial success," said Shannon Nutter-Wiersbitzky, who leads My Classroom Economy. "One way to do that is through practice. In a safe environment like school, kids can learn to spend less than they earn, get comfortable with delaying gratification, and even see how investing over the long term can really pay off. And they can have fun while they do it!"
Educate yourself—and share the knowledge wealth
Investing and financial management has its own vocabulary. Take some time to get familiar with these terms (if you're not already) and you'll be able to help kids understand them as well:
- Assets. Stock, bond, or cash holdings, as well as real estate.
- Portfolio. The combination of investments you hold or that a mutual fund holds. (It used to mean an actual, physical folder of stock or bond certificates.)
- Mutual fund. An investment vehicle that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time.
- Asset allocation. The mix, by percentage, of stock, bond, and cash investments you hold in your portfolio.
- Diversification. The spreading of your investment amount among a variety of holdings, rather than concentrating them in one. When you have a greater variety of holdings, your exposure to risk from any one is diminished.
- Time horizon. The span of time between when you make your initial investment and when you'll need to use the money.
- Risk. The danger that you could lose the money you invest. As with many things in life, higher risk can lead to greater rewards, but you need to be prepared for the consequences that something could go wrong.
Set your child up for investing—and education—success
Consider starting a college savings account, such as a 529, for your child. Make regular contributions and encourage your child to put some savings into the account as well. When you choose the investment mix for the account, discuss each option with your child and allow for input about the selection. Check in on the account's balance and review the portfolio's performance about once a year.
By the time you're tapping that account for college, your child should have a good grasp of investing concepts—and an appreciation for how saving and investing early and regularly can help build up a balance to fund a financial goal.
- All investing is subject to risk, including the possible loss of the money you invest.
- We recommend that you consult a tax or financial advisor about your individual situation.
- Diversification does not ensure a profit or protect against a loss.