Teaching your kids about money and how to invest is an important part of their financial education. It’s never too early to start; in fact, if you wait until they’re adults, it might be too late. Here’s how to teach your children about investing and finances so that they can develop good money-management skills from an early age.
- 1 Explain Debit vs Credit
One of the best ways to teach your children about investing is by explaining how checks and balances work in the real world. You should explain to them that there are two sides to every transaction: a debit and a credit. Debits are negative; credits are positive. Debits are withdrawals from your account; credits are deposits into your account. This is important because it will help them understand why they can’t just spend their way out of debt or save their way into wealth — they must manage both effectively.
In addition, make sure they know how debits and credits relate to expenses and income because this will help them keep track of where money is being spent or coming in during any given period. For example, if someone buys something with cash (debit), then receives cash back (credit) when they return it later down the line after deciding they don’t want it anymore; all those little transactions add up into one big dollar amount over time which affects whether or not someone has enough savings left over at the end of a year.
- 2 Provide Opportunities to Earn Money
Providing your children with opportunities to earn money will teach them invaluable lessons in budgeting, saving, and spending responsibly.
Your kids are likely more aware than you think. They may not know where their allowance is going or why they need to save for college, but chances are they have some idea about the value of money. If you give them a chance to make some of their own, it could be an eye-opening experience for everyone.
It’s never too early to start teaching your kids about earning, saving, and spending money (responsibly.) By providing real-world experiences that help them learn how much things cost and how long they take to earn back, they’ll develop a better understanding of what it takes to get ahead in life and avoid getting into debt later down the road.
- 3 Explain Taxes
Teaching kids about taxes gives them a clear understanding of what it is to be an adult. Taxes are a fact of life and understanding them is essential to becoming an adult. Taxes are how we pay for government services, like roads and schools. They’re also a way to help the community. When you buy something with your own hard-earned money, you pay sales tax (or VAT). This means that everyone benefits from your purchase: everyone has access to working roadways, other infrastructure, education, and other government services.
As much as most adults dislike paying taxes, it’s important to understand their function and what sorts of taxes, and the percentage of these taxes, we all pay.
- 4 Talk About Balancing Risk vs Reward
Next on the list is teaching your kids about the basics in risk versus reward in investing; and balancing this with their goals. The first step is to explain the concept of risk and reward. If you invest so much into various instruments, you might expect to receive growth or repayment of your investment with some interest. But not all investments are created equal, and many carry a wide range of positive and negative returns.
A good starting point could be explaining the varying savings accounts at the bank. Then teach them about the stock and capital markets once they get used to seeing some interest develop on safer assets. Balancing this with goals is equally important. If your goal is to spend the money on a purchase by year-end, then more volatile investments like the stock market might not make sense. If your goal is retirement, which happens to be 40 years away, then the stock market looks more appealing as the risk of loss is spread out over a much greater time frame.
- 5 Explain Different Types of Investments
If you have investments like a 401(k) or individual market account, this is the time for your children to learn about the stock market. The first thing you should do is make sure that your child understands that investing money in the stock market is not guaranteed. Then explain the difference between stocks, bonds and mutual funds so that they are aware of what type of financial instruments are out there.
- 6 Show & Explain a Financial Statement
Finally, show them your statements and explain why you are putting your money to work in the markets for your future financial goals.
Teaching your children the value of money and how to manage it is a difficult but important aspect of parenthood. When you teach them about making smart investments and taking care of their money, they’ll learn that
there are consequences for their actions, and that often delaying the impulse purchase and seeking a worthy savings or investing goal will be better for their financial health in the long run. This is crucial as adults because there will always be consequences for our financial actions.
I encourage you not to give up on this, especially because it can be a bit boring to teach. The more you talk about money with your kids, the more they will learn about it. With this knowledge in hand, they will be able to hopefully make good financial decisions as adults.
