Financial Literacy: How to Teach Kids About Investing

Now more than ever, we’re living in a world where it is important to have a firm grasp on money management and personal finance. When it comes to investing, there is truly no substitute for education and experience. And, when it comes to meeting savings and retirement goals, there is no substitute for smart investing. This is why it is so important to educate your children and grandchildren about personal finance while they’re young.

The daily hustle and bustle of life can make it hard to find the time to sit down and begin having conversations with your children about finance. However, by teaching basic principles like saving, interest, and risk and reward in your daily activities with kids, you can instill in them the financial literacy they’ll need to succeed financially as adults.

Educating kids about complex topics requires simple, straightforward lessons. Here are five strategies you can use to impart your wisdom about investing and saving to the kids in your life:

1.     Begin with Saving

Foundationally, for kids to understand the importance of investing, they need to understand saving first and foremost. Kids should be given away to accrue their own money, whether through an allowance, completing chores, or gifts at holidays and birthdays. It’s never too late to start assigning chores or small tasks that they can do to start earning money. Enhanced financial literacy – and the opportunity to learn about saving versus spending using their own money – reinforces fiscal responsibility from an early age. They’ll learn about saving up over time for a toy or game they want, and with older kids, you can help them open savings accounts and learn what banks do.

SEE ALSO: How to Enable Your Adult Children to Create Financial Independence

2.     Teach the Basic Concept of Compounding

Compound interest is an important concept to learn if your ultimate lesson is about the importance of investing, so start early and try to use a specific example. Some parents create a “Bank of Mom and Dad” to pay meaningful interest to their children on the money they save. This encourages saving, but it also teaches an important benefit of putting off instant gratification purchases in favor of achieving a long-term goal.

3.     Relate Lessons to Everyday Experiences

Abstract concepts are more difficult to learn, both for adults and for kids. So, relate lessons about money to interests and experiences that make sense to kids. For instance, a trip to the local grocery store offers many opportunities to talk about the value of money, financial decision-making, consumer spending, and even inflation. Current headlines could provide an opportunity to find ways to discuss with your kids what’s going on in the economy and to stress how important it is to save money. The point is to look for ways in daily life, or in special events like family vacations, to instill continual learning about money topics. Financial literacy topics can be a bit dull, but if kids can see concepts practically applied, it will help them understand them more readily.

4.     Educate about Risk and Reward

Risk and reward are easy concepts to introduce to kids as long as you tie them to an interest they already have. For example, you could play this Skittles investment risk game to make your lessons more exciting (and delicious!). Have your kids earn candies each time they correctly predict which number will be rolled on the dice; the object is to see who has the most candies at the end of the game and to keep track of the way they earned their candies. You could also have a family game night and pull out the classic financial risk and reward game – Monopoly! These are all useful and fun ways to impart lessons on future investing decisions.

SEE ALSO: 15 Money Habits You Should Be Practicing if You Want to Achieve Financial Freedom

5.     Make it Real

As your kids develop a baseline understanding of the above lessons and gain in maturity, why not let them buy actual stock in a company they choose? Ask your kids to select a few companies they’re interested in and let them do cursory research on each one, with the ultimate goal of selecting just one to invest in. You could start by simply watching that stock’s performance over time, or you could set up a low-cost brokerage account and let them purchase real shares. Make it a habit to monitor their relative gains or losses alongside them – so many important conversations can arise out of both scenarios.

Final Thoughts on Kids and Financial Literacy

Taking the time to instill financial literacy lessons in your kids will provide them with tools for long-term success in financial decision-making, including when it comes to saving and investing. Every money conversation you have is an opportunity to impart wisdom, but also to instill in kids the values you hope they carry forward into their financial futures. Having these conversations can provide a plethora of opportunities to teach and bond with your children. You can ensure that, in the future, you’ll be passing on not just inherited assets, but also a legacy of financial principles that will help them become more prepared and financially literate as adults.