Teach Your Kids To Invest

Some parents never talk to their kids about money.

A recent survey showed that the number one reason parents gave for not discussing money with their kids was "Kids have no business knowing this stuff."

The fact is, if they are old enough to spend it, they are old enough to learn how it works.

And, in today's uncertain world, nobody can depend on their employer or the government to take care of them financially - everyone must know how to take care of themselves.

In fact, if you're a parent, and you aren't teaching your kids to invest, you are failing in your duty as a parent.

You need to teach them table manners, you need to teach them personal hygiene, you need to teach them to tidy up after themselves, eat right, and do their homework - and you need to teach them about money.

The basics of money are very simple.

Money is earned - mostly from working hours for dollars, or from trading goods at a profit.

Money is spent - on living expenses, treats, and big ticket purchases.

Money is left over. (Ooooooops, here's where some of the parental role models let the side down!)

The left-over money is put somewhere so it can grow.

Teaching Kids To Budget

Obviously, the first step to investing is having some spare cash. (There are people at investment seminars who will tell you that you can start investing "with no money down" - I won't go into detail on that here, but I would call that working, rather than investing, and if I get time I will write another Hub explaining why.)

If you give your kids an allowance, make sure they set aside a portion for saving.

Don't give your kids an allowance? Just reach in your pocket every time they need cash?

That's like feeding them Pop-Tarts and soda three meals a day. I'm sorry to be brutal with you, but good money habits are just as important as good eating habits, and you need to invest the same amount if time, thought, and effort into both.

So, once you have set up a regular amount for their allowance, make sure they put the savings portion aside AT ONCE as soon as they get their allowance.

Teaching Kids About Compound Interest

Compound interest means that you get some interest, and then next time you get interest on your interest.

Over the long term, compound interest really adds up. Albert Einstein described compound interest as "the most powerful force in the Universe" - and he knew a thing or two about forces!

To do this demonstration for kids, we need to shorten the time span, so they can see the effect happening. Instead of years, we will use days, and instead of the interest rates the banks pay on deposits, we will use 50%, so it's easy to calculate (50% is half).

Stop for a second!

Take a quick guess as to how much interest you will have to pay your child on one dollar, if you pay them 50% interest, compounded, each day for a week.

Have you guessed?

Read on ...

Day 1: Take one dollar you child has saved, and put it in a big glass jar, somewhere prominent in the house.

Day 2: The next day, at the same time of day, have "interest time" - add 50c to the jar.

Day 3: The next day, at the same time if day, have "interest time" again - and this time, the interest will be 75c (50c interest on the dollar, and 25c interest on yesterday's 50c). Make your kids work this out if they are school age!

Day 4: The next day, when you have $2.25 in the jar at "interest time", you will be adding $1.13 in interest (halves round up).

Day 5: Now you have $3.38 in the jar, so the next day's interest will be $1.69.

Day 6: Our total is $5.07, which means the interest will be $2.54 (halves go up).

Day 7: Your little tycoon is the proud owner of $7.61 - plus today's interest of $3.81 - a grand total of $11.42.

Did you think you would be paying out that much?

Of course, in real life, it takes longer for compounding to really have a visible impact.

The purpose of this demonstration is just to give your kids a feel for WHY you keep going on at them to save their money.

If you're feeling brave, you can raise the issue of credit card debt with your kids - that's when compounding works against you, not for you! Just be prepared for kids who really get this to ask you, when you get out your card "are you going to be able to pay that off when the bill comes ....?"

Kids are a great conscience-nudger, because they just expect you to be doing the right thing - we'd do anything rather than let our kids down.

Teach them good money habits, and they will be like Jiminy Cricket on your shoulder - but much harder to brush off!

Teach Your Kids To Invest For Real

Take the saved allowance money, and maybe some birthday gift money, and buy your child a share in a company they can understand - for example Coca Cola, Disney, or McDonalds.

Show them where the stock market reports are in the local paper, and teach them how to find the price of their own investment each day.

You can find online tools which will graph the price history of a particular share - they are lots of fun, too.

If your child is homeschooled, you can make a project of researching the history of the company, and matching events in the company's history to changes in the share price.

There are dozens of creative ways to introduce your kids to the basics of money and investing.

Just as you invest time and energy in making vegetables seem appealing (or disguising them), invest time and energy in making good money habits seem appealing, too.

Especially if you have had money problems of your own.

After all, someone is going to have to pay for your nursing home, and if you're going to be broke in your retirement, you had better hope your kids have invested wisely!