Cash Chats: Make Money Matter with Your Teenager
Whether you consciously intend to or not, you're providing your teens with valuable personal finance lessons every single day. Over time, they have learned about earning, saving, budgeting, borrowing, spending, and giving to charity. Your teen is watching how you manage money at home. This will greatly influence how they handle finances in the future.
While many financial topics are discussed at home, one that often gets overlooked is personal investing. Teach your teen about investing basics so they learn from you, not potentially wrong advice from friends.
Investing may initially seem complex, especially with its jargon, but it's a worthwhile endeavor if your teen expresses interest.
What sets teens apart is their greatest asset: time. They have time to grow their savings using compound interest.
This will help them build a strong financial foundation. They can then achieve their life goals. Here are some pointers to instill healthy investing habits in your teen.
Educate teens on the fundamentals of investing
Guide them in grasping investing terminology and principles by simplifying complex concepts. Start by demystifying intricate words and subjects into understandable terms.
For instance, a bond is like a loan given by an investor to a company, government, or government-related organization. When you lend money, the borrower pays you interest. When the bond matures, you get your initial investment back.
Similarly, break down the concept of stocks. When a company seeks to raise capital, it sells ownership stakes in the form of shares of stock. Purchasing a share makes you a shareholder, entitling you to a portion of ownership in the company.
Introduce various investment funds to your teen's knowledge base. When you invest in a mutual fund, your money is pooled together with other investors. This pooled money is used to purchase a variety of stocks, bonds, and securities. Likewise, an exchange-traded fund (ETF) represents a basket of different investments. Familiarize your teen with the unique characteristics of each fund type as part of their ongoing learning process. Regardless of the investment vehicle, the primary objective is to generate returns. However, akin to life, there are no certainties. It involves assuming risk in pursuit of potential gains beyond the initial investment. Teach your teen about how to spread out their money, handle risk, and diversify investments to make smart choices.
Begin with familiar companies for your teens
Encourage your teens to construct a portfolio consisting of companies they are familiar with. Prompt them with questions such as: What clothing brands or shoe companies do you prefer? Which tech gadgets do you enjoy using? What streaming platforms do you subscribe to?
Encourage them to also observe the consumption patterns of others. Encourage discussions on topics like: Where do people typically seek entertainment? What are popular food choices?
Encourage your teenagers to study trends that are increasing the popularity of new products. These trends include the focus on fitness, healthy eating, and eco-friendly cars. Prompt them to consider how these consumer trends may present investment opportunities both presently and in the future.
Emphasize the significance of diversification
Engage your teen in a discussion about the age-old adage, "Don't put all of your eggs in one basket." Encourage them to think about why it's important to spread investments across different stocks. This can help reduce the risk of losing a lot of money if one stock goes down in value. Emphasize spreading investments across different types of assets and within different sectors, industries, and company sizes to reduce risk.
While diversification does not guarantee profitability or shield against losses, it serves to balance risk and potential reward. Encourage your teen to recognize diversification as a fundamental strategy for managing risk effectively.
Educate teens on the advantages of a "buy and hold" approach
It's common for teens to perceive investing in stocks accessible with a click as akin to playing a video game. However, it involves real money and genuine risks—it's not a game. While short-term market fluctuations can be unpredictable, historical data shows long-term upward movement in the stock market. Investing in good stocks for a long time, instead of short-term trading, has been a successful strategy for many investors.
It's important to talk openly with your teenager, explaining clearly that life, including investing, doesn't always come with guarantees.
Foster patience: Demonstrate to teens the power of compounding over time
Albert Einstein famously dubbed compound interest as "the most powerful force in the universe." With time on their side, our teens possess the capacity to invest over numerous years. Encourage them to explore online interest calculators to observe the potential outcomes of regular investing at moderate returns.
Teach them about the Rule of 72. It is a simple way to estimate how long it takes to double an investment with a certain interest rate. The formula is 72 divided by the interest rate equals the number of years it takes to double the investment. If an investment yields 7%, dividing 72 by 7 shows that the money will double in about 10.28 years.
Make it tangible
To solidify the fundamentals of investing, consider assigning your teen specific companies and industries to observe and research. Guide them in interpreting their findings as they progress. If you're comfortable, ask your teen to join you in watching your investments. Share what you learn, especially from any mistakes you make.
Bottom Line
The process of guiding a teen through the intricacies of investing can be both enjoyable and fulfilling. However, it's crucial to consistently emphasize the presence of risks and the potential for financial loss. Yet, initiating an investment education and journey early on could yield significant dividends in the long run. Recall the wisdom of Benjamin Franklin: "An investment in knowledge pays the best interest."
Sources:
https://www.fidelity.com/learning-center/personal-finance/teach-teens-investing
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
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