The other day, my daughter asked me what stock was. She had heard it on the radio in the car and was curious to learn more. Instead of giving her a textbook answer, I said, 'Honey, what's your favorite toy?'
I knew the answer would be her Disney princesses, and formulated an investment strategy from there.
Teaching Kids About Investing Starts with Something Familiar
Parents often struggle with how to teach important financial literacy skills to their children. From saving to budgeting to earning money, it can be hard to know where to start. That is especially true when it comes to investing.
Many parents don't understand how to invest, so how can they get their children to view it as an important lifelong habit to develop?
Believe it or not, your child's toys may hold the key.
That's because beginning with something familiar to your child will help them understand the concepts of saving and investing and develop an affinity for them.
Early understanding is critical because it can help your child avoid costly financial mistakes as an adult.
Put Investing in Terms Kids Understand
When my daughter and I arrived home, I pulled up an internet window and typed in "DIS."
From there, I began to explain to her what a stock was, how it was connected to her Disney princesses and asked her if she would like to own a piece of Disney stock.
You can do this with your child by explaining what investing is and why a person would do it—tell them investing is growing your money. Share that one way to grow money is through buying stock in a company you know and trust. Explain that buying a stock share is buying a piece of a company.
Show your child that a stock price changes all the time and how they can track it online by typing in the special symbol for a stock or even by asking a device like Siri or Alexa what a company's stock price is.
Teach your child that when the stock price goes above what you bought it for, you make money. When it goes below what you purchased it for, you lose money.
If Warren Buffett Does It, So Can You
Take a word of advice from legendary investor Warren Buffett and start investing with what you know, such as what's in your pantry.
Look through your kitchen for familiar brands you've bought for years. In your child's case, ask them what they know and love. It could be Disney, or Hasbro, or Kraft.
Use that as your starting point for covering basics with your child.
If your child is too young to have a savings account with money that can be withdrawn and used for investing, open a small brokerage account with your own money and use it to teach your child how to make small investments that you can track together.
Teaching Kids About Saving
If your child is old enough to have a kid’s debit card like GoHenry, use that as an opportunity to explain the difference between saving and investing, as well as the value of amplifying savings by wisely investing a portion of it.
Explain that saving money means putting it aside to spend later on specific things that you know you will need like new clothes or shoes, or for things you might need later—like money for a car or college.
Teach them that savings are protected, unlike investments, which can lose money over time, and help them understand the need for both.
It may even help to explain that if Princess Tiana wants that restaurant of hers to thrive, she'll need to open both savings and brokerage accounts.