The old saying “I wish I knew then what I know now” haunts many people for various reasons. This adage is particularly haunting in the world of investing, where fortunes can be made or lost based on a few choice decisions (or indecisions). One of the greatest regrets many investors have is that they did not begin thinking seriously about money until later in life. Some don’t even get their first taste of fiscal responsibility until they are young professionals setting up their 401(k)’s. Even then, the act of consciously saving and physically choosing an investment vehicle may be years, if not decades, away.
Though you can’t go back in time to begin investing at an earlier age, you can set your children up for a bright investment future. In fact, children as young as five can become financially literate through a little hard work and consistency on your part, and a little trial and error on their parts. Below are a few rules that can open the dialogue about money, saving and investing.
1) Trust Your Kids with Money
Children are, by nature, visual learners, which is why it is important they be allowed to interact with money at an early age. The easiest way to do this is to give your child an allowance. Some experts recommend that the allowance be equal to the child’s age (a five-year-old would receive a $5 allowance, and so forth), while others believe it should be based upon one’s behavior, accomplishments or chores. Though there’s no right way to give your child an allowance, the important thing is that the allowance comes consistently. Therefore, if you’re supposed to give a seven-year-old $7 on Sunday night, then do it every Sunday night. If you promised to give your 12-year-old $10 after he washed your car, be sure you’ve got the money on you when he’s finished. Without the follow through, it’s difficult for young children to associate money with value because they cannot predict why it is granted sometimes after a job well done or at a week’s end and not other times.
2) Allow Them to Prioritize Their Expenditures
An allowance can be a fun way for a child to gain some independence and practice her decision-making ability. However, it is also a way to teach responsibility. Before a child can become a savvy investor she needs to become a savvy saver. A good way to do this is to scale back slightly on how much money you spend on your kids. Explain to them that as they get older they are given more responsibilities, both with money and with chores. Also explain that now that they have their own money they will have to decide what to spend it on. If you’re no longer funding your 12-year-old’s Friday movie nights with friends then she may have to think twice about whether she wants to forfeit this tradition in favor of the lip glosses that she (read: you) compulsively buys.
“You’ve got to give them the money tools and then move away,” said Mary Ryan Karges, the sales and marketing manager for Moonjar, a Seattle-based company that invented a piggybank-like contraption called a Moonjar moneybox, which contains three separate jars and slots for saving, spending and charitable giving. “You want to talk about money, show your kids how to deal with money on a daily basis and then give them some responsibility.” An easy way for your child to determine how much she should spend or save each week is by dividing the money she earns into pre-set amounts. Perhaps 50 percent goes toward saving, 35 percent toward spending and 15 percent toward giving. The Moonjar not only encourages smart saving and spending, but helps parents teach their kids philanthropy and the importance of investing in others as well.
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Adults know that investments are made in the hopes that the original money invested will grow over time. Kids don’t know this. What you can teach them, however, is that they can obtain almost any item they desire if they bank their money until they have enough to pay for it themselves. This allows children to create, with your help, short and long-term investment goals. If your 16-year-old wants a car — or perhaps a better one than you’re willing to provide — he must calculate how much he needs for that car, how much he can reasonably put toward the purchase every week or month and how long it will take him to reach his goal. This activity can easily turn into a lesson in portfolio analysis. You can create an Excel spreadsheet that translates the entered data into various graphs that document how much money your son has to go before he reaches his goal. When he saves less money one month because he wanted those new tennis shoes, his “portfolio” will show that his progress suddenly went flat. Ultimately, he’ll learn to create balance between short-term and long-term wants, weighing each heavily before making a monetary move.
4) Let Them Make Their Own Mistakes
It’s nearly impossible for an avid investor to walk away from the market unscathed. Everyone makes mistakes, including children. The great thing about childhood mistakes, however, is that they provide valuable learning experiences with relatively small losses. “It’s important not to interfere too much [with the child’s money],” Karges said. “My son saved and saved for this [digital pen called an] i-pen. It was the whole world to him. He saved all his money, accumulated over $100, bought the pen and never touched it. The investment completely didn’t work out but it’s a lesson he got to learn.”!
Chances are, Karges’ son was pretty upset and regretful about his investment decision. But you can be sure that he’ll think twice before investing in another gadget that he hasn’t extensively researched.
5) Do an Investment Test Run
According to the Securities Industry and Financial Markets Association (SIFMA), children as young as nine are able to grasp the concept of the stock market and its potential investment opportunities. SIFMA even developed a game, appropriately named “the Stock Market Game,” which teaches more than 700,000 children “the long-term saving and investing fundamentals.” Even if your child doesn’t get the opportunity to play the Stock Market Game in the classroom, you can create your own version at home. Have your child choose a few publicly traded companies that create products he enjoys. Disney, Sony, Abercrombie & Fitch and Coca-Cola may be popular with your kids. Teach them the fundamentals of the stock market, including how to locate a stock’s price and whether it has increased or decreased in value over time. Have your child follow that stock for a few weeks or months to determine whether that company would have produced real-world returns or not.
6) Prepare for the Real Thing
Once your child has a solid understanding of the stock market, allocate some money, perhaps $100 or so, to invest in the stocks of his choosing. By now he ought to be able to pick stocks from companies that he both believes in and that he knows have solid return histories, based on the observed price volatility and the stock’s highest and lowest selling prices over the past year.
7) Map Out a Few Investing and Saving Strategies
By now your child knows how to earn money, why to save money, and how he can potentially earn or lose more money by investing in the stock market. Next, you’ll want to help your child create a financial plan for the future. Take into consideration his earning potential over the next few years, any big-ticket items he may have his eyes on like a car or apartment, and how much he can realistically afford to save and invest. Have your child research the different banks and accounts to determine what works best for his strategy. Based on his age, level of understanding and goals, your child may want to open a savings, Certificate of Deposit, money market or checking account. He may also want to establish a Roth IRA or invest in mutual funds or savings bonds. Before any accounts are opened, however, you want to be sure that your child has factored in compound interest, APRs and maturation periods, along with any penalties and fees involved in these accounts or investments.
Finally, map out a saving and investing strategy that you are both comfortable with. Set realistic goals that account for unexpected expenses and potential losses. If your child’s able to master this process at a young age — or if you’re feeling particularly generous — you can even offer to match your child’s savings deposits or investments dollar-for-dollar, providing them with a significant incentive to continue acting financially responsible.
