Children Must Know Powers of Saving and Investing

When it comes to money, parents usually have somewhat vague advice for their children. This “wisdom” may be all your child needs, however, to learn good financial habits.

Getting Started

The first part of teaching your child good habits is to engage their interests. One good way to do this is to start giving your child an allowance; they should put part of it toward spending and part toward savings. Let your child use their own judgment on where he or she wants to spend the money. By doing this, you will give your child a sense of responsibility toward the allowance.

Lesson No. 1: Saving

The part of your child’s allowance that he or she needs to save should go into a savings account that earns interest. Take your child to the bank to open the account and involve your child in the process. Make sure your child understands why the account is there, and understands what interest means.

Your child’s involvement shouldn’t stop when that first visit to the bank is over. You should set up the bank account so the statements and the account are in your child’s name. Let your child open the envelop when the statement arrives in the mail. Go over the account balance with your child, and help him or her understand why the balance is growing. Have your child put the monthly statements in a binder; this will teach your child to be organized.

Take your child to the bank when you give him or her the allowance. Have your child deposit the money. The point of this lesson is to teach your child about saving, rather than spending, money. This will lay the basis for a lifetime habit.

Lesson No. 2: Investing

Start talking about how to make money grow faster when your child becomes older. Many teenagers are able to understand the basics of how stocks work. You should spend some time explaining to them about risk, and talking about the potential risks and rewards of investing in the stock market. If it is feasible for your family, give your child a few hundred dollars and let them invest in the stock market. Help your child research companies that are interesting to him or her, and take our child through the process of conducting research about those companies.

Help your child buy shares in the stocks they would like after completing the research. Remember: The purpose of this is not to create a stock portfolio that will fund your child for life. The purpose is to allow your child to learn about money, risk, and reward by making his or her own choices. If you truly are concerned about your child’s choices, limit investments to one or two companies for $100 each.

Don’t forget that losing money is part of the process of learning about stocks. This is a learning experience. You are not giving your 13-year-old child all of his or her savings and letting them invest in the market. You are teaching your child about the investing and the consequences of investment decisions.

Statements for the brokerage account should go to the child. Your child should put these statements in the same binder or folder he or she is using for the savings accounts. You and your child can use these statements to compare the fluctuations in each account, and talk about the differences between brokerage accounts and savings accounts.

Looking toward the Future

As your child gets older, you will be able to talk about more complex investing ideas, like diversification and different methods for savings. You may want to explain that as people accumulate money, certain types of fixed-income investments may be an appropriate item to put in a portfolio. If possible, you can use your portfolio to show your child how the portfolio changes over time based on personal needs and desires.

Things to Remember

Remember that knowledge is power. It’s important to remember that your child needs to learn about money, and that you can give them this gift and this power. You will teach your child how to become a self-sufficient adult who has confident in the ever changing financial marketplace.

Teaching your child about how to saving and handle his or her own financial situations is just as important as your saving money for your child’s college education and other activities. Teaching your children about how to handle money may in fact be even more valuable than just giving them cash or a fixed rate credit card and letting them go free. You should start early and give them these tools to last them a lifetime.

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