None of us need a reminder of how trying last year was. The onset of the COVID-19 pandemic and its subsequent fallout sent millions of Americans into stress-induced worry about their health, safety, and finances—as well as those of their families and other loved ones. The fear (or in many cases, the reality) of being furloughed or laid off from work and having to live paycheck to paycheck became all the more prominent during this time. And for those of us with young children, having to tell them that money was too tight to afford certain expenses only perpetuated this stress.
Indeed, teaching children the value of a dollar is an important conversation most parents and families need to have, especially after enduring the pandemic’s impact. Perhaps even more importantly, however, is teaching our children the value of investing to prepare them for future financial hardships and challenges. This is one lesson that serial entrepreneur and founder of the Business Bullish podcast Marlo Richardson wants to help parents teach their children so as to best prepare the next generation should another year like 2020 ever occur.
Familiarize your children with the ways markets work
“Teaching children economic basics and concepts like ‘risk vs. reward’, ‘profits vs. losses’, and ‘supply vs. demand’ are crucial stepping stones in creating a finance-savvy foundation for them,” says Richardson. “When it comes to information, children are like sponges: they absorb everything they hear, see, read, and engage with. By teaching them how markets work from an early age, those markets and the ways they work will feel more accessible and easier to navigate in the future.”
As Richardson explains, the earlier that children have access to valuable information, the more likely they are to retain that information throughout their life. For parents that start familiarizing their children with the introduction of standard economic principles and practices, the greater the chance their children will have in understanding the intricate nature of stock markets, as well as concepts like bonds, shares, and the multitude of factors that play into the rising or falling of prices on the market.
Though it may take some time before children can better understand more complex investment concepts such as asset allocation or portfolio creation and management, each child matures at different rates.
“Like most life lessons,” Richardson continues, “the sooner children learn about how to understand and navigate markets, the better prepared they will be to make future investments.”
Explain how, when, and why to choose which stocks to invest in
Even before your children start researching company or corporate profiles online to learn more about their financial information, it is important that they have an elementary understanding of how to invest in the stock market.
“Along with knowing how the stock market works and how to invest in or trade stocks,” Richardson says, “they also need to know how variables like timing and external factors affect certain stocks.”
For example, if your child has a savings account in their name, you can explain to them the difference between a low-risk, low-reward asset such as a savings account compared to the more general variable-risk, variable-reward assets stocks are often classified as. By explaining that the rises or drops in stock prices tend to be less predictable, and often depend on a company’s current and projected profitability and growth, you can begin showing them some examples of historical stock performance data from name-brand companies they may already be familiar with, such as Netflix, Amazon, Nike, or Apple.
“Familiarity often plays a large role in a child’s ability to consume and retain information,” Richardson adds, “so being able to show them real and relevant examples of stock performance is another great way to help familiarize them with markets. It helps add clarity as to why and how certain stocks perform the way they do at different periods of time, and can instill a stronger notion of which stocks they would like to invest in, why, and when in order to maximize future returns.”
Encourage your children to invest their savings in a portfolio
While this step may have to wait until your child is a bit older and can better grasp more in-depth explanations of investments, encouraging them to invest at least a portion of the money they have earned or saved in stocks or other portfolios can serve as a powerful financial learning tool for them.
“Just as each child develops and learns at different rates and in different ways, many children learn best when they are able to perform an activity themselves,” Richardson explains. “Your child may be more excited about investing in stocks or portfolios than others their age, but they should also be able to understand the risk of investing everything they have saved.”
According to Richardson, teaching your children not to invest every dollar they have saved in stocks can prove difficult, but convincing them to invest only about one-third of their savings in stocks to watch how their investments perform over time can also serve as a valuable educational tool to make them more financially and economically savvy.
“But not every child is fortunate enough to have a savings account, let alone any money in it,” Richardson concludes. “In this case, if you have spare money to help them invest, one option may be to open a brokerage account for them that they can make small investments with in the future. Another option is to generate a model portfolio of stocks from companies your child is interested in watching and investing with, and regularly revisit that model with them to watch how those stocks perform over a period of time.”