How to teach your kids about investing

Teaching kids about investing is a great way to develop their financial literacy and set them up for financial success later in life. Investing is a life skill and I believe that Sharesight is uniquely positioned to be an excellent tool to teach kids about investing. In this blog, I discuss some simple ways to explain investing to your kids, plus some hands-on strategies to give your kids safe and practical experience with investing.

1. Start with the basics of compounding

Albert Einstein once said that compound interest is the eighth wonder of the world. It’s a powerful concept but difficult to comprehend even for adults. You can watch the wonder and amazement when the magic of numbers causes the balance to build up.

The formula for compound interest or compounding is:

Source: Investopedia

The table below illustrates how quickly compounding can work on a given amount of principal:

2. Explain the meaning of investing

The purpose of investing is to generate a return that you get from buying assets that have the potential to grow in value over time or have the ability to generate an income over time, and ideally a combination of both.

While everyone invests with the aim of making money in the future, there are inherent risks involved as well, wherein, the value of what you invest in could also go down.

You can use the examples of stocks, bonds, investment property, FX, etc. to show how investing works.

3. Make it relatable

You can make it relatable by showing them examples from companies that they use every day. For example, the portfolio below has shares in companies that my 10-year-old uses.

The groups (also called Custom Groups in Sharesight) are useful to categorise the companies that kids are familiar with.

4. Start small

Encourage kids to start investing with small amounts of money, like a few dollars. This can help them understand how investing works without risking too much money.

ETFs and index investing can be good places to start to show the power of investing. There are a lot of investing platforms with the ability to set up kids’ accounts. However, it is wise to seek the help of a financial adviser and a tax accountant to explore the tax implications of such accounts.

##5. Use investment tracking apps

There are many investment apps available that allow kids to invest small amounts of money in stocks and other assets. These apps often have educational resources that can help kids learn about investing.

For example, using Sharesight as a portfolio tracking tool can help a child visualise the various components of a total return – dividends, capital gains as well as currency gains. Below is a performance report downloaded from Sharesight showing these return components in a mock portfolio of companies that a child can identify with.

Best of all, signing up for a Sharesight account is totally free. Your child can explore various parts and reports in Sharesight to learn more about returns and also about backtesting with the Share checker.

6. Encourage learning and research on companies and assets

Encourage kids to research companies or assets they are interested in investing in. This can help them understand the potential risks and rewards of investing.

The practice of researching companies that kids use on a day-to-day basis could be a good place to make them think and read more about the products and services they use. Making the link between their actions and how companies generate revenue will make them more conscious consumers as well as good learners of investing.

You can always relate these concepts back to the next time you are playing a game of Monopoly.

7. Be a patient teacher

Being a patient teacher as well as a patient investor can help both the parent and child alike. Start talking to them about investing and investments when you have discussions as a family. In the beginning, they may not pay much attention, but one message that’s clear from various financial literacy surveys is that kids need to learn about money from their parents and family.

The additional benefit of these lessons is that kids can get more interested in their maths classes and the practical applications of the concepts they learn in arithmetic.

Use Sharesight to keep track of your kids’ mock portfolio

Remember, Sharesight is free to sign up for and can serve as the family’s wealth-tracking tool for life.

• Track all your investments in one place, including stocks in over 40 major global markets, mutual/managed funds, property, and even cryptocurrency
• Automatically track your dividend and distribution income from stocks, ETFs, and mutual/managed funds
• Run powerful reports built for investors, including performance, portfolio diversity, contribution analysis, multi-period, multi-currency valuation and future income (upcoming dividends)
• Share your portfolio with your loved ones and make discussions about family finance a dinner topic of conversation

Sign up for a FREE Sharesight account to start tracking your performance (and tax) today!

Disclaimer: This article is for informational purposes only and does not constitute a specific product recommendation, or taxation or financial advice and should not be relied upon as such. While we use reasonable endeavours to keep the information up-to-date, we make no representation that any information is accurate or up-to-date. If you choose to make use of the content in this article, you do so at your own risk. To the extent permitted by law, we do not assume any responsibility or liability arising from or connected with your use or reliance on the content on our site. Please check with your adviser or accountant to obtain the correct advice for your situation.

FURTHER READING

• What are the advatages and disadvantages of family trusts?
• How to calculate portfolio turnover
• How to evaluate a stock