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Hi, Team! Today I have a treat for all of us parents! Sure, you may have covered budgeting or income protection when talking with your kids… But how does your at home “Investing for Kids” curriculum look these days?
If you’ve been wanting some guidance to help educate your teenager about different investing options – look no further. This post is perfect for all of us parents who know we need to have this conversation with our kids – but just don’t have the expertise. And here’s our high-powered backup:
Chelsea Brennan is the founder of Mama Fish Saves, a personal finance blog that focuses on family finance, investing, and reducing money stress. Chelsea is an ex-hedge fund investor whose work has appeared in a wide array of publications, including Forbes, Business Insider, Haven Life, and more.
I’m thrilled that Chelsea agreed to stop by and share some of her experience and wisdom with us all! Take it away, Chelsea:
We all remember our first job and cashing that first paycheck. But whether you were delivering papers, scooping ice cream, or working on a tobacco field, we were all probably in our teen years. Which makes it the perfect time to learn about investing.
I’m a big proponent of talking about money and investing from an early age. However, the perfect time to start diving deeper into investing is the first time your child has their own money. Before then, it’s all theory. As a teen, the opportunity finally feels real.
Here are the nine lessons every young investor needs to learn.
What stocks and bonds actually are
It’s unlikely that anyone gets to their teen years without hearing about stocks. Even concepts as basic as, “Facebook is down 20% today.” But hearing some key investment lingo isn’t the same as understanding it.
Take the time to explain the difference between a stock and a bond. Including their rights as an owner of either.
A stockholder owns a very, very small piece of ownership in a business. While their ownership stake might not let them fire the manager at the local Starbucks for giving him the wrong coffee, it does give your teen the power to vote on members of the Board.
Alternatively, bonds are the debt of a company, municipality, or government. Whoever issued the bond owes you money back at a pre-determined time. And to compensate you for borrowing your money, they pay the bondholder interest every six months. If a company goes bankrupt, the company owes their bondholders before they can give any cash to their stockholders.
While your teenager might never invest in a single stock or bond, they still need to know what they are and what to expect.
How you make money investing
Alright, so we’ve got stocks and bonds. Your kids’ eyes are probably glazing over. So, better skip to the good stuff. How do you actually make money investing?
For bonds, the concept is pretty straightforward. A company pays you interest to borrow your money. As long as they pay you back when they are supposed to, that interest is your profit. You can re-invest it to earn more money or spend it as a source of passive income.
Stocks are a little trickier. This one is easier to explain for a single company.
The more profitable a company is, the more it’s equity (total value of the company’s assets minus its debts) is worth. If a small shoe company suddenly picks up an Instagram endorsement from Lebron James, it’s probably going to sell a lot more shoes. Stockholders benefit from that increase in value because each of their shares rises to account for the new profit opportunity. If the shoe company gets so big that they no longer need all their capital to cover debts or invest in the business, they may even pay dividends – one-time or recurring payouts to shareholders.
Over the long-term, the stock market grows. This is partially due to a continual increase in productivity. As companies can produce more efficiently, they reduce costs and sell far more, which means even more profits. And gains for shareholders.
Why index funds make investing easier
Choosing the shoe company that’s going to make it big or the hotel chain that is absolutely going to pay its debts isn’t easy. Maybe that’s why 95% of professionals can’t beat the market average.
Take the time to explain to your teen the power of index funds. Express how in one click you can buy stock in over 3,000 companies (if you opt for the total stock market fund). You get the exact return of the market, beating 95 out of 100 professionals. For a lot less than even one share of Amazon. And for the lowest fees available.
If they’re bored talking about investing already, maybe drop the hint that index funds will mean less time staring at their portfolio.
And never say no to free money
Cue the eye roll. I’ve never met a teenager that would turn down a crisp $20. Or even $1. But if they’ve never heard of 401(k) or retirement matching when they get their first full-time job, they may miss that that detail in the HR paperwork really means “free money.”
No matter how savvy an investor, you can’t beat a free match. Explain how matching works and how to ensure they get the full value of any employer benefit.
There are ways to invest beyond the stock market…
Stocks and bonds are the easiest way to invest for the long-term with limited work. But it isn’t the only way. And it isn’t the only option your teen will encounter as an adult. In fact, their current ideas of investing might be more in line with small business ownership and real estate than the stock market.
It seems like the options available for the average American to invest are growing every day. There is peer-to-peer lending, crowdfunded real estate and angel investing, microfinance, and more. AirBnB and VRBO are making more people rental asset managers than ever before.
Showing your teen that they can always keep a keen eye out for opportunities may help them become a lifelong investor.
… But never lose sight of risk
Alternative investment options can offer the potential for higher returns. But they also usually come with either more work or more risk. Often both.
Talk to your teen about identifying risks in investment opportunities. Considerations like tenant turnover and property damage at a rental asset, subprime borrowers in a peer-to-peer lending portfolio, and strategies that are untested like crowdfunded real estate.
In college, the entrepreneurial spirit is at its peak for many people. Friends sit around dreaming up companies and ways to become the next Zuckerberg. While you don’t want to crush that spirit, you want your teen to have the tools to evaluate options with a keen eye.
It’s okay to take risks, especially when you’re young and have little to lose. But it’s always better to create a habit of going in with both eyes open.
If anyone mentions a guaranteed return, run.
When it comes to investing, there is no guarantee. No one knows what the stock market will do tomorrow. Or whether a new company will get off the ground. Or whether a newly purchased single-family rental property will find a quality tenant.
When talking to friends looking for business loans or financial advisors they meet in the airport, this is one of the most significant red flags your teen should learn to watch out for. Let them know that anyone promising them a 20% return or a doubling of their money is either a scam artist or has no idea what they are doing. Neither is a good sign.
Millennials are more prone to financial scams than any other age group, more likely due to inexperience than a knock on the generation. Whether it’s guaranteed returns or how to protect their information, make sure your teen knows how to avoid bad actors before heading out into the world.
Sometimes they’ll lose money…
Yet, even if you send your child out into the world armed with the financial education you wish you had, there will still be a time when they lose money. The market cycle will turn at precisely the wrong time. They’ll do all their research yet still end up with a dud stock or poor asset.
Involving your teens in discussions about times when you’ve seen your portfolio fall, or how you are preparing for the next crash, will help normalize market cycles for them. And open the door for discussion when they are scared that they’ve made a lousy investment choice in the future. Having someone to talk to during tough times helps us all make better decisions.
… But when it comes to investing for kids, time is on their side
Never let any investing conversation end without discussing the absolute superpower of time. Investing, as we all know, is a long-term game. The sooner your teen can start investing – and stay invested – the better off they will be in the long run.
My favorite example for teens is always how to become a millionaire. Assume, for a moment, that the average stock market return with dividends reinvested was 8% a year.
An 18-year-old who started investing $40 a week, and did so each and every week, would have over one million dollars when they were ready to retire at 65. Their total contributions over their life, just from this one goal, would be $99,840. For over a million dollar in retirement assets.
Alternatively, a 30-year-old who wanted to reach the same goal would need to invest $105 a week. Before this person retires at 65, they would need to contribute $196,155. Still an excellent return to build a million-dollar nest egg. But waiting meant dropping from a 10X investment to a 5X investment.
For both the 18-year-old and the 30-year-old, they would see many market cycles over their decades of investment experience. But consistently investing through the ups and downs, sticking to a simple strategy, can make you a millionaire.
Start the conversation now!
Financial literacy stretches beyond smart budgeting and avoiding debt. Building wealth and creating true financial freedom requires a person to be comfortable investing.
Even if talking to your 16-year-old who just got their first job about the markets seems daunting, the day of their first “real” job, when they are handing 401(k) options is coming sooner than you think. Give them the tools to make those choices with confidence.
Have you had discussions with your kids about investing? If so, what topics did you cover? If this conversating is coming up for you, I hope you feel better prepared after reading Chelsea’s great points! Either way, let us know in the comments below and we’ll keep this conversation going!
Thanks for reading!