In this article I share how you can talk to your kids about the basics of investing.
It’s always helpful to use a conversational tone and language that children can relate to. Think of this as a friendly chat, where we’ll be weaving real-life examples into the world of finance.
The first step is to address the concept of earning money. There are two basic ways most people earn money: trading time for money or selling something that you’ve created. For instance, working in a supermarket for a certain number of hours and getting a wage in return is an example of trading time for money.
Alternatively, making lemonade and selling it in the neighbourhood is an instance of creating a product and selling it. These examples help children understand that money is not conjured up but is a result of different kinds of hard work.
Every method of earning money comes with its set of benefits and limitations. Trading time for money has a clear constraint: the number of hours in a day. The money earned is directly proportional to the time spent working. On the other hand, selling something you’ve created doesn’t have such limitations. If your product or service is in demand, the potential for earning money is substantial and not tied to a finite resource like time.
Once children have a solid understanding of how money is earned, we introduce the next crucial elements: saving and investing.
Saving money in a bank helps it grow over time, courtesy of the interest it earns. Interest can be compared to a token of appreciation from the bank for choosing to store your money with them. To make this tangible for kids, you can create a simple at-home experiment. Borrow a toy or book from them, and when you return it, give them a small surprise as ‘interest’.
Investing is the big picture we are aiming to bring into focus. When you invest, you are essentially giving your money to a business to help it expand. As a return, these businesses share their profits with investors. An everyday example could be buying shares in a supermarket. When the supermarket makes money by selling groceries, a part of those profits gets shared with the shareholders.
To further this understanding, encourage your kids to think about businesses they interact with on a daily basis. Ask them to consider what it might be like to invest in these companies. This exercise not only stirs their curiosity about investing but also makes the entire concept more relatable by associating it with familiar businesses.
“By starting these conversations early, you’re laying the foundation for their financial education and decision-making skills.
It’s important that children understand they have several options when it comes to their money. They can choose to spend it right away, save it for a future purpose, or invest it to potentially earn more. Starting these discussions at an early age lays the groundwork for financial literacy, enabling them to make informed decisions in the future.
Ultimately, the goal is to introduce kids to the idea that they have choices with their money. They can spend it immediately, save it for the future, or invest it to support businesses and potentially earn returns.
By starting these conversations early, you’re laying the foundation for their financial education and decision-making skills.