While books, games, and toys are all great gifts for kids, one of the gifts we can give our children that often goes ungiven is financial education.
Kids that aren’t taught basic financial and money management skills can accidentally end up in debt or living outside of their income level. This could potentially lead them to need financial support from parents much longer than is ideal.
Here are some vital money lessons that can help your kids get a great start to their financial education.
Begin With the Basics
The simplest way to get started is telling your kids about money at points during day-to-day life where it is relevant. Showing your kids the basics of finding items on sale or comparing prices between different options is an easy way to get them to start thinking about financial responsibility.
Some other ways to kick things off are to show them the bill-paying process so that they can learn how much it costs to have electricity, internet, or A/C every month. If you are currently in debt, it can be an important lesson to teach your children about the steps you are taking to get out of it and how to avoid it in the future. An allowance is a great way to teach money management as well by allowing them to earn some money by doing things such as chores or mowing the lawn.
The Magic of Compounding Interest
The stock market has generally grown at a rate of around 10% or more, relatively consistently for many years, with some exceptions. Teaching your kids about the power of investing early is how they can eventually take advantage of it. The tables below show how powerful compounding interest is over time.
Here is how much an investment of just $1,000 can grow given enough time at a rate of 8% per year:
|Over this period…||$1,000 will grow to:|
The growth of a single investment is substantial, but with small investments every year, things can get growing much more quickly:
|Growing at 8% for||$1,000 invested annually||$3,000 invested annually||$5,000 invested annually|
|40 years||$279,781||$839,343||$1.4 million|
|45 years||$417,426||$1.3 million||$2.1 million|
|50 years||$619,672||$1.9 million||$3.1 million|
First Investing Steps
An important next step is to introduce them to the stock market and explain what stocks are. Help them identify companies that interest them and make a list. Think about companies whose products or services they use or love. Think about products and services all around them.
Start your kids off by pretending to invest in the companies they have chosen. Yahoo! Finance and other websites allow you to make a mock portfolio and pretend you have purchased a certain number of shares at the current price. This allows you to check on the portfolio’s changes and progress and show them how well they would be doing with that investment. If any stock moves a significant amount, it is important to look up any news about the stock and see why it shifted. This can show your kids how well certain investments can do, and show that not all stocks are created equal.
After this, it is also possible to get your kids started on investing with something like a custodial brokerage account. In the short term, they will likely lose money, so they must understand that patience is required when it comes to investment and that choosing stocks wisely is important. The more they learn about investing, the more easily they will be able to assess a stock and determine if it is a proper investment. Let them know that having patience and building a growing portfolio will help them reach financial goals and security for the future.
One of the most valuable gifts you can give your kids is a strong financial education and a basic understanding of investing. The habits it will help develop will have lifelong impacts.
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