When, how, and what to teach your kids about investing?

You might not raise the next Warren Buffett in the process (although who knows), but you'll definitely give your kid the best gift: financial independence.

Are you one of the 38% of parents who feel that their families did not adequately provide them with investment education?

This is a result of a survey by MotleyFool; the real percentage is probably (and sadly) much higher.

That’s why one of the greatest gifts you can give your children is helping them get started with investing.

The most obvious example? Warren Buffett – one of the most renowned and successful investors in the world.  He bought his first stock at the age of 11.

By the time he was 16 he was already worth $53,000 in today’s money.

What people lose by not investing earlier

When you’re young, you can afford to invest in more volatile assets – like stocks – as you have the time to wait for any losses to turn into gains.

Basically, in the very long term, the stock market has so far tended to go up – because it’s mostly made of the best, most profitable businesses. A long-term bet on the market is a long-term bet on the economy.

At least in solid, developed economies like the US:

Lots of crashes, yes – but most are not a problem if you started investing when you’re 6!

The market, in the long run, keeps going up and to the right, just like the economy.

However, in the short term (and sometimes even for a decade or two), the stock market can be pretty scary. Which is why a basic rule when planning your retirement says that you should hold “100 minus your age” in stocks.

This way, the closer you are to retirement, the more you’re protecting your money from these drops.

The challenge is that most people are too risk averse – and they take the same attitude when investing on their kids’ behalf.

For example, another survey by CNBC and Acorns found that only 20% of parents invest on their children’s behalf “properly” – meaning, with a tax-free portfolio made mostly of stocks, as kids have more time to “ride out” the ups and downs in the market.

Instead, 24% of parents just put money for their children in a savings account or in bonds – a strategy more appropriate for a pensioner than for a child:

This might feel natural, as most adults are a lot older when they begin to invest and are more inclined to less risky assets like bonds. But it’s completely wrong.

At least that’s better than the 53% of parents who didn’t save or invest at all for their kids…

Some basic concepts that I wish I was taught as a child

Before you go explaining them what “price to earnings” is, start with the basics. Here’s what I wish I was taught as a child:

Compound interest:

Our brains really have a hard time understanding compound interest. It just doesn’t feel natural, or intuitive. How big of an impact can “interest on interest” have, right?

You can use a chart – but not sure kids would find that fun.

Instead, try a simple math exercise where you ask them to calculate simple versus compound interest, so they can “see for themselves”. Maybe with some extra allowance to motivate them. “Best stock pick gets $10?” 😉

What stocks are:

Pieces of a company.

They really need to get that – too many people think of them as these “virtual tokens”.

Help them understand it’s real. Maybe even give them a nice printed version of one, like Disney used to:

The "buy and hold" approach:

Explain to them that they shouldn’t sell that easily. Talk to them about how the market has grown despite world wars and pandemics.

How to set an investing goal:

Would they like to go to a top college? Or drive a nice car at 18? Go on a gap year before university?

There’s an acronym used in management science, called S.M.A.R.T: goals that are Specific, Measurable, Achievable, Relevant, and Time-Bound.

So make sure to have them say it out loud, like this: “I want to save $5,000 for my first car in six years by investing in stocks.”

Next step: how to get kids started with investing

Method 1: invest on their behalf

Parents can invest on behalf of their children and set an age for their child to receive the money. If you can, use an account that allows you to invest for them tax-free.

In the US, parents can open Custodial Roth IRAs for their children. The account is run by parents and gains are tax-free.

The only catch is that the child can only put in what they earned themselves. Really, that’s what it says on the government website.

We can only presume it’s from a job at the local sheet metal factory.

A better option for American parents is the 529 College Savings Accounts – it has the advantage that the savings don’t need to come only from the poor kid’s newspaper ride or something. And it’s tax-free if you use the money for college.

In the UK, Junior ISAs are similar – except that the child doesn’t need to earn money or anything like that. Stronger child labor laws? In any case, you can just put in money on behalf of your child and let it grow, tax free.

In Canada, one of the most popular ways to invest for a child's future is through the Registered Education Savings Plan (RESP). RESP allows parents to save for their child's post-secondary education partially tax-free. The government then matches these contributions too.

In Singapore, parents can open a Child Development Account (CDA) for their children. The CDA is mainly for the child's education and healthcare expenses. The government provides matching grants to incentivize savings, making it a really attractive option for parents.

In India, the Sukanya Samriddhi Yojana (Girl Child Prosperity Account) is a government-backed savings scheme aimed at securing the financial future of a girl child. Parents can open this account in the name of their daughter and make regular, tax-free contributions towards her education.

Japan has a Child Savings Account (KIDS Saving) program that encourages parents to save for their children's future. It also comes with a range of incentives, including tax benefits and government contributions. 

And the list doesn’t stop here – many countries nowadays have some sort of account that’s either has some tax advantages, some government top-up or some other sort of bonus that can really add up.

Method 2: make learning about investing fun

Explaining the concept of stocks and investing can be a difficult task for parents with young kids. Children can learn a lot through investing shows. Here’s some examples:

Teen Titans Go!

This show loves to add a twist on topics not usually discussed with children. They have episodes on everything from health insurance to personal finances. 

Biz Kid$

This is a PBS television series that aims to teach kids about money management, entrepreneurship, and investing.

Method 3: video games about investing

Of course there are video games about investing!

Cool Lemonade Stand

This has the best graphics of a lemonade game that we’ve found so far (not that you’re looking for PS5 quality here, but can’t hurt).

Since owning a stock is owning a piece of a company, maybe it’s good for kids to understand how a business works – at least the basics.

Investor Island

This one is a digital version of a board game, and it combines stock picking with good old fashion… “blasting away with fireballs and lightning bolts”.

So a bit random but it does have a feature where you can “re-enact” specific events in stock market history, and beat other players at it. That’s pretty cool.

Stock Market Simulator Game

Once they’re ready for something that resembles an actual investing app, it’s time for a “demo version”. This one, for example, can be a good choice so that they can “play” with stocks without touching actual money:

Actual plan on how to do it

• Age 0: your baby is born. Open an investment account for them. Ideally tax-free.

• Age 5: their first piggy bank: introduce them to basic financial concepts like saving and spending. Piggy banks are cute ways of doing that.

• Age 8: Begin teaching them the basics of business. Help them launch that lemonade stand. Or other side gigs (babysitting?). Give them a cute notebook to write down expenses and revenue. Talk to them about it.

• Age 10: Their first stock market demo account. Walk them through it. Make it competitive. Give them a bonus to the allowance whenever their stock picks “make it”.

• Age 13: Co-investing time. Your money, but you make the choices together with them. Help them visualize their goals and make sacrifices for it.

• Age 18: Transition the account fully to them. Help them plan out their next investments. Decide if you’re going to “top up” their contributions for a while and help them form the habit of investing money regularly.

A last bit of homework for you as a parent

Take income insurance:

You don’t want your kids to have to stop that compounding and dip into their investment account because you lost your job. Most people don’t even know income insurance exists but it’s really awesome.

It can ensure you get an amount similar to your usual salary in case of accidents, sickness, but also unemployment!

You’re welcome.

Make a will:

Should be obvious, no? Stressful and, again, something most people don’t want to think about.

Don’t be them. Try using an online service like Trustandwill in the US or Farewill in the UK.

Teach them about other bits of personal finance too:

Taxes, budgeting, insurance, and loans – all never really covered in school.

Ground them if they say anything like:

• “Oh I already know about investing, I trade cryptos”

• “I own a few NFTs”

• “I’m in a DAO on Discord”

• “web3 is the future”

• “WAGMI”

• “I bought land in the metaverse”

• “I just started a play-to-earn game”

Any of these sentences should lead to them losing access to Internet for at least a month.

Bonus: they’ll get to practice writing essays on good old paper, ChatGPT-free!