Before children can learn how to invest money, they need to learn how and why to save money. There are a variety of options available to teach and motivate children to save. A common method parents use to help children to hold onto savings is by giving them a stipend or allowance. Caregivers and parents can ask their children to save their allowance, and discuss with them what percentage of their money they will have to save every week or month. To further encourage saving, you could match whatever your children save. Make it clear that although it is their match money, they cannot spend it without seeking permission. You could place your match money into their savings account, telling them that this is how they will save up for something they really want later. This may not work for you, and some children can’t stay keep their sights on the future of their money, so instead, you could use easy incentives of many types of things, such as something “for next week” or “next month,” rather than 6 months or a year from now.
Once your children have fully grasped the concept of saving money, educating them on where and how to invest is a logical step. Many children have no clue what investing is, much less how to do it. Investing is a very grown up thing, but you can share your ideals about investment in easy to understand terms. Instructing your children on the proper way to read a simple account statement and what stock markets, bonds, mutual funds are is a good way to slowly make earning and spending money more real to them. Offer brief insights as to the purpose of stock brokers, fund managers and the like.
There is a great book about money that is geared towards 2nd graders and up, by Hollis Page Harman called, “Money Sense for Kids”. Another book, for older children by David Chilton, is called, “The Wealthy Barber”. It is a beginner’s walkthrough on financial planning and investing for teens.
Many parents opt to jumpstart the investment process for their children through personally adding to a savings account for their child, both at mutual funds or brokerage houses. Talk to your children about the risk of investment, but in child terms. Using monopoly as an example is good way to tie in something they know with real life choices. Sometimes, when large losses take place, children are turned off by investing, so make sure your children understand that investment are meant to be long term.
Assist your child in investing in equity mutual funds. Research different programs that have lower returns and interest, and decide which program is right for you and your child, once your child has developed a large investment portfolio from either savings or financial gifts, they can begin to start diversifying among various mutual funds. This whole process will become a valuable learning activity that will provide a foundation for lifelong financial skills.