Practical Ways to Share Your Investing Tips with Your Kids and Grandkids
You've likely witnessed significant changes in the world of finance and investing over the years. Now, with the responsibility of guiding your kids and grandkids toward financial empowerment, the concept of introducing them to the realm of investing might appear a bit overwhelming.
While teaching the younger generation about investing can seem daunting, with a few fundamental concepts and a willingness to learn together, you can help your kids and grandkids build a solid financial foundation.
I'll walk you through basic investing tips tailored to the young minds of today, sharing insights on how to save for their future and inspiring them to invest wisely.
Starting Early: The Importance of Time
The adage "time is money" couldn't be more relevant, particularly in the context of investing. The younger generation possesses an invaluable treasure: time. The earlier they embark on their investment journey, the more time their investments have to flourish. Setting the stage for investing gives you a unique opportunity to nurture their financial security from an early age.
A 2022 survey from T. Rowe Price reported that 39% of children have a savings account, yet only 6% have an investment account that holds stocks, mutual funds, or EFTs. If you haven’t already done so, consider setting up custodial accounts or college savings plans for your children or grandchildren. The funds accrued can then be channeled toward education or other significant life milestones. By instilling in them the importance of consistent, even modest, contributions, you’re sowing the seeds for significant wealth accumulation in the future.
Start talking with them early on about the accounts you’ve set up. Encourage them to monitor the accounts with you and watch their progress. If you make changes in how these accounts are invested, discuss with them the reasons behind your decisions.
Understanding the Power of Compound Interest
We all know compound interest is one of the most powerful concepts in the world of investing. It's time to pass on this knowledge to your kids and grandkids. Explaining compound interest to children simply and understandably can be done in just a few simple steps.
Step 1. Start with Simple Interest: Begin by explaining the basic concept of interest. Use relatable examples, like when they lend a toy to a friend and get a small treat in return. This helps them understand the idea of earning something extra for letting someone else use their money.
Step 2. Introduce the Twist: Compound Interest: Once they grasp simple interest, introduce the concept of compound interest. Use a relatable analogy, such as a snowball rolling down a hill, getting bigger as it collects more snow. For older kids, a visual chart can be helpful.
Step 3. Show Real-Life Examples: Share practical examples they can relate to. As a self-directed investor, you probably have several examples you can share with them from your investment portfolio. Show them how, over time, their money can grow without them having to do anything.
Step 4. Make it Fun: Turn learning into a game. You can use apps or online calculators that simulate compound interest scenarios. Let them experiment with different amounts of money, interest rates, and time periods to see how these factors affect the growth of their savings.
By breaking down the concept of compound interest into these four steps, you can help them understand the idea of earning interest on their savings in a simple and relatable way.
Teaching the Basics of Investment Vehicles
Explaining investment vehicles in simple terms can help your kids and grandkids feel more confident about investing. Start with the basics:
Stocks: Share the concept of owning a small piece of a company. Use familiar brands to illustrate this point. For instance, if they enjoy using a particular technology product, explain that owning a share of the company is like owning a piece of that product. Explain to them why you chose to invest in certain companies.
Bonds: Describe bonds as loans to companies or governments. When they lend money to a friend and expect it back with interest, explain bonds work similarly.
Mutual Funds: Simplify mutual funds by likening them to a basket of different investments. This diversity can help reduce risk because if one investment performs poorly, others might perform well and balance it out.
Index Funds: Introduce the concept of index funds. Use an analogy they can relate to, such as index funds are like a group of superhero teams for your money. Instead of picking just one superhero (company), index funds put all the superheroes together in one team. This team comprises lots of different companies, like ones that make toys, phones, and even ice cream. When you invest in an index fund, you own a tiny piece of all these superheroes.
7 Ways to Make Investing Fun, Educational and Real
Investing doesn't have to be boring or intimidating. You can make it a fun, educational, and real experience for your kids and grandkids. Here are a few strategies:
Strategies to Get Started
Virtual Stock Market Games: Many online platforms offer virtual stock market games that simulate real investing scenarios. Engage your kids and grandkids in games such as The Stock Market Game or Build Your Stax to help them learn the ropes in a risk-free environment.
Investing Books and Resources: Plenty of books and resources are designed to introduce kids to financial literacy and investing. Look for age-appropriate books that explain money, saving, and investing engagingly.
Real-Life Examples: Share stories of successful investors or companies that started small and grew over time. These stories can serve as inspiration and demonstrate that anyone can achieve financial success with the right mindset and strategies. As a self-directed investor, you have plenty of your own stories to share about your investments.
1. Let Them Invest
Once your child or grandchild feels comfortable with virtual investing, consider letting them invest a small amount of real money. This could involve opening a custodial account or using a fractional investing platform.
Choose well-established companies that your child can relate to and discuss the investment. Emphasize that investing involves both potential rewards and risks and that being patient and thinking long-term is essential. By starting small, you're allowing your child to dip their toes into investing while learning valuable lessons about money management and decision-making.
If they aren’t quite ready to make the jump into investing with real money, set up a mock portfolio so they can make some trades and follow their “investments” on their own.
2. Encourage a Long-Term Perspective
In a world where instant gratification is common, teaching the value of patience and long-term thinking is a valuable lesson. Help your kids and grandkids understand that investing is a journey that requires discipline and a focus on long-term goals.
Use relatable examples, such as planting a seed and watching it grow into a tree. Just as a tree takes time to bear fruit, investments take time to yield substantial results. Reinforce the idea that market fluctuations are normal and that staying invested through ups and downs can lead to better outcomes over the long haul.
3. Lead by Example: Share Your Investment Journey
The best way to inspire your kids and grandkids to invest is by leading by example. Share your own investment experiences and lessons you've learned along the way. Be open about successes and setbacks; these stories can provide valuable insights and help them understand that investing involves risks and rewards.
Include them in discussions about your investment decisions, explaining the thought process behind your choices. This involvement can give them a sense of ownership and responsibility in managing their financial future.
4. Embrace the Digital Age: Technology and Investing
In this rapidly advancing digital age, it's crucial to acquaint the younger generation with the role of technology in investing. Demystify the process by explaining how technology has democratized investing, making it more accessible and user-friendly than ever before.
Discuss the advent of robo-advisors. While not entirely replacing human financial advisors, robo-advisors provide an excellent introduction to investing for your kids and grandkids. Their user-friendly interfaces and low fees make them a valuable tool for novice investors.
Encourage your kids and grandkids to explore investment apps designed for the younger generation, such as Greenlight or Copper. These apps often offer fractional investing, enabling them to purchase a portion of a stock or fund, even if they don't have much money to invest initially. This promotes a sense of ownership and engagement, as they can invest in companies they're genuinely interested in.
5. Explain the Role of Risk and Diversification
Introduce the concept of risk and diversification as fundamental elements of investing. Share the analogy of not putting all your eggs in one basket. Explain that investing in a single company or asset can be risky because if that company or asset underperforms, they could experience significant losses. Diversification involves spreading investments across different assets, industries, or even countries, which can help mitigate risk.
Teach them that while investing in stocks can bring higher potential returns, it also comes with greater volatility. Bonds, on the other hand, tend to be more stable but offer lower returns. A balanced portfolio that includes both stocks and bonds can provide the benefits of growth potential while reducing the impact of market fluctuations.
6. Teach Them about Inflation and the Importance of Monitoring Investments
Help your kids and grandkids understand the concept of inflation. Start by using relatable examples from their daily lives. Consider organizing a "price comparison" activity by taking a trip to the grocery store. Choose a few items that they frequently enjoy, such as their favorite cereal or snack. Compare the prices of these items from a few years ago to their current prices. This hands-on experience shows them how prices change over time and encourages critical thinking about how inflation affects their purchasing power.
By using relatable examples and interactive activities, you're helping them demystify the concept of inflation and providing them with a valuable lesson in financial literacy. This helps them grasp the idea that inflation gradually makes things more expensive and highlights the absolute necessity of investing in assets that can outpace inflation to preserve and grow their wealth.
Guide them in regularly monitoring their investments. While long-term investing is key, periodic check-ins are essential to ensure their investments align with their goals and risk tolerance. This practice can also help them make informed decisions about adjusting their portfolio as their circumstances change.
7. Encourage Lifelong Learning
In the dynamic world of finance, you know firsthand that staying informed is paramount. Encourage your kids and grandkids to adopt a mindset of lifelong learning. This includes keeping up with financial news, understanding market trends, and exploring new investment opportunities.
Share resources like reputable financial news websites, podcasts, and online courses focused on investing. By nurturing a thirst for knowledge, you empower them to make well-informed decisions and adapt to the ever-evolving investing landscape.
Encourage your high-school-aged children or grandchildren to take a personal finance class at their school. This presents an ideal opportunity for the concepts you’ve been teaching them to receive additional reinforcement from an external source. If their school doesn’t offer the course, you could encourage the school to add one. Organizations such as NextGen Personal Finance provide engaging curricula designed to captivate students in personal finance.
How Chicago Trust Administration Services Can Help You
As a self-directed investor, you possess a wealth of knowledge and life experience that can significantly benefit the younger generations in your family. By imparting the basics of investing and sharing your investment experiences, you're equipping your kids and grandkids with valuable skills and empowering them to make informed decisions about their financial future. After laying the foundation for traditional investing, they’ll be ready for the next step of self-directed investments.
At Chicago Trust Administration Services, we stand ready to help you engage in conversations with your children and grandchildren as you navigate the intricacies of investing. To see how I can help, I invite you to schedule a complimentary meeting with me by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.