Investing can be a complex subject for anyone to understand, especially kids. There are a lot of new terms to learn —stocks, bonds, mutual funds — not to mention abstract concepts to grasp, such as risk and inflation. However, teaching investment basics to your child or teen doesn’t have to be as complicated as you might think. With financial literacy becoming more and more integrated into school curriculums across Canada, today’s children have a great foundation for learning about investing. Parents can add to that with regular, age-appropriate life lessons and money talks with their kids.
Here are four tips to help you get started.
Every child learns differently, so first consider your child’s individual learning style. How do they prefer to absorb, process, understand and retain information? For example, when learning what a stock is, some children may understand the concept through a verbal explanation. Others would learn better if you show them visuals, including a diagram like this:
For others, you might want to start with a trip to the stock market. In Toronto, for example, Stock Market Place has hands-on technology and interactive displays related to the stock market, trading and investing.
The world of investing is full of jargon that can be rather intimidating to anyone new to investing, especially children. As you prepare to start talking about investing with your child or teen, it helps to have some simplified language:
| Industry terms | Suggested explanation |
|---|---|
| Investing | A way to grow your money by putting it into stocks, bonds or other investments |
| Interest | Money received for putting/saving your money in a bank account |
| Risk | The fact that you won’t always know if your investment will make money or lose money when you invest |
| Asset allocation | You never want to put all your money in one place, so you divide your money to be invested into different types of investments |
| Volatility | When the value of various investments moves up or down quickly |
| Diversification | Investing money across different types of investments, geographies, industries, level of risk and more |
| Compounding | Re-investing what you make from investing to grow your money faster over time |
Investing can be difficult to understand but it can help to explain it in familiar and relatable terms. For example, most kids at an early age are able to identify certain companies and the service or product they provide. You could begin by following the stock price of your child’s favourite company and watch how the stock performs over time – does the stock’s performance match your child’s opinion of the company?
Using examples to explain abstract concepts like compound interest can also help kids understand investing and potentially put this knowledge into practice. For example, if your teen is interested in purchasing a car after they get their license, you can show them how much they need to start saving now in order to buy a car in 5 years. You can also show them how much faster they could grow their money by investing it instead of keeping it in cash.
| Earnings if Dan invests a $100/month | Earnings if Dan saves a $100/month | |
|---|---|---|
| Year 1 | $1,227.89 | $1,200 |
| Year 2 | $2,518.59 | $2,400 |
| Year 3 | $3,875.33 | $3,600 |
| Year 4 | $5,301.49 | $4,800 |
| Year 5 | $6,800.61 | $6,000 |
Assumes a 5% Annualized rate of return. Source: RBC Global Asset Management Inc. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund.
Now that you have started to talk about investing with your child, it’s time to put those discussions into action. For example, you could set up a dummy portfolio your child can use to explore buying and selling stocks in real-time with fake money. Or, involve them in your own investing by showing them how your investments are doing from time to time. Ultimately there are many ways to incorporate fun and engaging investing activities into your discussions.
The bottom line
Empowering your kids with basic investment knowledge introduces them to some important life lessons and the possibilities for building wealth. Over time, you can help them discover that investing is an important tool to achieving their financial goals, whether that goal is saving for a new video game console, university or their very first home.
Learn more about the value of investing and how an effective long-term investing strategy can help you reach your financial goals.
Regularly rebalancing your asset allocation can help you keep track of the amount of risk your portfolio is exposed to. Talk to your advisor for more information.