If you’re a parent, I’m sure you’re trying to teach your child how to save money…but if you want to set your child up for a higher level of financial success, you need to teach them the difference between economy and invest. This first lesson in financial literacy could be the difference between a comfortable nest egg and financial hardship later in life.
The difference between investing and saving
The concept of saving versus investing is quite simple: saving is the gradual setting aside of money, usually for a specific future purchase or as a cushion in case of a financial emergency. Savings are virtually risk free. Investing, on the other hand, put money aside for the sole purpose of making more money, and IThis carries a certain risk.
Saving is easier to illustrate to a child than to invest, children understand a piggy bank, only if they put a part money from their birthday in a savings account for a few birthdays they can afford a bigger one toy they want, so it makes sense to introduce it to them at a younger age. Investing is a more abstract concept, as it involves pooling your money with others and participating in financial markets that can be hard to imagine. It also involves morelong-term thinking and the idea of an intangible reward in the distant future. “You’ll be able to afford a good retirement home” isn’t very convincing to most 12-year-olds.
When is your child ready to learn to invest?
According to Mélanie Mortimer, head of the foundation at the Securities Industry Capital Markets Association, fourth graders are ready to learn about investment markets. “When you’re 9 years old, 10 years old, you are learning fractions; you learn decimals… The idea that you can take something very small and grow it into something much bigger is very compelling to them,” Mortimer said. Yahoo! Finance.
How to Illustrate Investing to a Child
For the youngest, the site enrich suggests using a lemonade stand to illustrate how investing works. The investors (the parents, in this case) distribute the money for the lemons and the sugar. The child stands under the hot sun and does the work while the parents relax. If the stand brings in money, the parents get their investment back and a bit more. The child’s profits can be invested in lemons and sugar to weed out the investors, or kept, and the investors can add more money to hopefully make a profit the next day. If the stand fails, the parents, having assumed the risk, lose their initial investment, where the child loses only the time he spent selling lemonade.
Don’t throw your child in the stock market until they’re ready
A basic understanding of investing through a lemonade stand is a great start, but as your child gets a little older, you’ll need to introduce them to the shared risk and reward of the financial markets where they’ll likely put their real money. .
It may not be a good idea to jump straight into the Dow Jones or NASDAQ. Some people suggest letting your child choose stocks they like and buying a stock or two, and tools and games like The stock game, a website that allows you to create a portfolio of stocks to see how you would fare in the real market if you bought them, can spark a child’s interest and give them an understanding of the basic concepts of Marlet. But in real life, investing by picking individual stocks is usually not a good idea.
Like this Yahoo! Finance As the article points out, for kids, you should start with an education in basic financial concepts like inflation, risk versus reward, and compound interest. Investing Basics Aren’t As Sexy As Buying A Thousand GameStop stocks and sell before the bubble bursts, but real life will likely be putting part of a paycheck into a 401K plan instead only high-risk, boring but reliable financial instruments.
If your child is fascinated by money and investing, like a future Warren Buffett, they will have a lifetime to learn the intricacies of it.capitalism (Aalso, congratulations! Play your cards right and you’ll end in the right assisted living facility.) But for most kids, basic financial literacy should be enough to get them through life and keep them from wasting their money. In fact, instilling investment as a habit is more difficult but probably more important than in-depth knowledge of the market.
Teach your child to pay themselves first
The habit of investing money might be the most important gift you give your child, so try to drill it into their skull.
Experts generally recommend using 10 to 20% of your income to invest, and they can open a Roth IRA as soon as they start doing income, even just in babysitting or lawn mowing. Emphasize that this money is alone to earn money. It’s not to buy anything, and it’s not to wait for a rainy day.
When you establish a budget with your child (you make budget with your child, to the right?), teach them that this 10% is paid first. You want them to understand that this is a payment for themselves. It’s not an afterthought or something you do “when you can”; it is a requirement. Point out to them that they probably won’t immediately notice a penny on a dollar, but when they retire they will be amazed at how rich they are.
Take a second and really imagine if you had done it regularly yourself (me neither) since you were the first started making money. Do the math: 10% of everything you earn, a rate of return of 8-10% per year and approximately 50 years of compound interest. That’s a heartbreaking amount of money, isn’t it? If you only made $12 an hour for your entire professional life, you would still be a millionaire when you retire.