Kid-Friendly Ways to Teach Investing this Summer
25 Jun 2018 | Back to Blog
As June gives way to July, celebration gives way to the quest for new uniforms, new books, and summer school enrollment, we think it’s a good time to discuss teaching children about investing.
The GSAT cohort just learnt quite a bit about it. Having spent months with their noses in books, instead of video games, they are now reaping the rewards of that investment in their education. For parents, this can be a great opening to a conversation about the value of time, and using it to your advantage.
Time is a valuable asset for investors and students alike. For students, time allowed for concepts to sink in and formulas to be retained, preventing the need for frantic cramming the month before exams. For investors, time allows for compound interest – interest on interest – to help your money grow.
- For the summer, open the ‘Bank of Mom and Dad’ and start your children off with an amount you can manage, like $1,000. Pay a monthly interest of 10% as an incentive to invest at your bank. Yes 10% per month is high, but the key here is to teach a meaningful lesson in investing versus spending. Explain that if you choose to spend the $1,000 now, you miss out on earning $100 dollars next month.
- Help them earn more, by getting paid for doing chores for the summer – not for the basics like keeping a clean room – but for watering or raking the yard, bathing the dog, doing the dishes, or sweeping the living room. Give them two jars, one for money they will spend now, and the other for money they will add to their investments. Add the money from the ‘investment jar’ to their account at the ‘Bank of Mom and Dad’ and recalculate their interest at the end of the month so they see the tangible reward. This will teach kids the importance of being an active investor.
- Tell them stories. This is where break out the “Well, when I was your age…” stories and use them as tools to explain concepts like inflation. Next time you stop for patties, tell them when you did Common Entrance (“Whoa mom and dad, you are ancient!”) a patty cost $20, and now the price is $150. By investing correctly, we manage to maintain our buying power by getting interest on our money that outpaces inflation. When you go to the grocery store together, tell them about stocks, by explaining how owning a little piece of PepsiCo means that when people buy sodas, Gatorade or Frito Lay chips, PepsiCo’s profits go up and so does their stock value. Stocks are the easiest concept to introduce to children, because they are surrounded by companies and their products. Just imagine their eyes glazing over if you tried starting with exchange traded funds or P/E ratios instead.
- Next lesson: goal setting. Now that they have a sense of what can be achieved, have them write down their goals for the summer. People who write down their goals save on average two times more than those who don’t. Make it a fun art project. They can decorate a piece of poster board with their goals and timelines, and hang it above their savings jars. Let them understand that every time they pick the spend jar, they are prioritizing their immediate spend over their longer-term, bigger goals. That candy bar, for example, might be putting them further away from the mobile phone or tablet they want for high school.
- Let them make mistakes, even as you provide guidance – the candy versus phone story, for example – let them choose. Sometimes they might pick the candy, but allow them to make silly purchases. Then do the math to show them how much interest they missed out on, so they understand the consequences.
- Teach them diversification. Buying all of just one stock is like opening a store that only sells French fries. What would happen if people want to eat healthier, or the farmers get a potato bug that ruins their their crop? Most stores sell more than one thing, and most smart investors have different assets in their portfolio.
Upgrade from the ‘Bank of Mom and Dad’ to real investments, this is a good time to explain that a unit trust is a great way to diversify, even if you don’t have a lot of funds to start. A unit trust is an investment vehicle made up of pooled funds from many investors, collected for the purpose of investing in different assets. Opening an account early means you have more time to save, earn compound interest, make mistakes, and diversify – all the lessons of the summer. By teaching your children about saving and investing early on, you will raise confident investors, with the kind of money habits that ensure your investing legacy lives on.