You want to raise financially savvy kids who go on to become financially successful adults. How best to make that happen?
Since even I zone out talking about budgeting and insurance, those are probably not the best topics to focus on. If we’re going to be successful teaching kids to do anything, we need to make it fun.
Of all the personal finance topics, I think investing presents one of the best opportunities to inject fun into the learning process. The idea of owning a piece of Disney, Mattel, or Roblox and being able to track its value in real time can be presented in an exciting and fun way.
Starting at around age 8, kids can grasp the concept of investing. While your kid might be ready earlier or later in life, getting the ball rolling and teaching them about investing can be a great way to help them be successful long-term.
In this post, I’ll talk about:
- How to get started
- Key concepts
- Stocks, ETFs and crypto
- Stock market basics
Let’s get started.
How to get started
As I mentioned, you can normally get started talking with kids about investing at 8 years old. At this age, the best approach is to invest in individual stocks of companies they’re familiar with.
You can start the conversation by simply saying, “How cool would it be to be able to own a piece of (favorite company name)? We can do that by buying shares on the stock exchange. Would you like to learn about how to do that?”
In order to get started buying stocks, you need to open a brokerage account. There are a lot of great places to do this such as Fidelity, Charles Schwab, and most retail banks also offer these accounts. Ideally, you want to open your account where the fees and expenses are low.
I’m going to dissuade you from opening an account with companies like Robinhood who have created “gamified” interfaces which promote increased trading activity. With stock investing, more activity isn’t necessarily better, and the more time spent on a trading app is also not necessarily a good thing.
As you’re getting started, I recommend you open the account in your name and refer to it as “our family account.” As your kid becomes more interested and engaged, you can look to open a custodial account in their name.
Once a month, you should have a “family meeting” to go over your investments. This will be a great time to talk about how your investment(s) are doing and to reinforce key areas of learning, which we’ll get into now.
If your kid can start saving and investing early, you can almost guarantee long-term financial success.
The more we learn about something, the more comfortable we get. When you teach and actually show your kids how to invest, you demystify the process and can get them started on a great path.
When you constantly invest in one company or investment, it’s called dollar-cost averaging. Meaning, the price at which you’re buying shares goes down over time.
As a family, when you begin to purchase shares of additional companies, you’re teaching your kids about diversification.
As you accumulate shares and the value goes up, you’ll be able to teach them about the power of compounding.
Should you decide to sell shares, you’ll be able to teach them about how profits will be taxed.
Keep investing in existing, selecting new companies. Build a portfolio. Diversification. DCA. Risk and return. Compounding.
While you don’t need to become an expert in the stock market or investing, you do need to educate yourself on your investments. We’ll talk about the key areas to focus in the stock market basics section.
Stocks, ETFs and Crypto
No offense to fixed income, AKA bonds, but they aren’t sexy enough to make it into a kid’s portfolio (you’re more than welcome to disagree and include them). That being said, cash should most definitely be a part of what you teach and talk to your kids about.
As your kids are getting started, it’s easier to understand stocks versus diversified vehicles like ETFs and mutual funds. Once your kid is 13 or older, you can start looking at those vehicles. This is a great opportunity to talk about diversification and risk.
If you or your kids want to invest in crypto, great! I encourage you to stick with the more established coins like Bitcoin and Ethereum.
Stock market basics
What is the stock market? The stock market is a place where people can meet to buy and sell shares of publicly traded companies. When the stock market is open, you’re almost always able to buy or sell shares of stock.
What causes the prices of stocks to move? Market forces like supply and demand cause the price of stocks to go up and down. When many people want a stock, the price is high. When fewer people want a stock, prices commonly go down.
Terms to know:
Market capitalization or market cap, refers to the total value of a company’s stock. You multiply the total number of shares with the current share price. If the company has 1000 outstanding shares, and the current share price is $10, the company’s market cap is $10,000.
Share price is the price of one share of a company’s stock.
Important metrics to pay attention to:
P/E ratio, or price to earnings ratio is the ratio of a company’s share price to the company’s earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.
A high P/E ratio often means a company’s stock is overvalued, or that investors are expecting a high growth rate in the future.
Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.
Price-sales ratio is calculated by dividing the company’s market capitalization by the revenue in the most recent year.
This ratio describes how much someone must pay to buy one share of a company relative to how much that share generates in revenue for the company. Generally speaking, the lower the P/S ratio, the better.
Debt-to-equity ratio indicates the relative proportion of shareholders’ equity and debt used to finance a company’s assets.
The debt to equity ratio measures the riskiness of a company’s financials by comparing its total debt to its total equity. It is closely monitored by lenders and creditors, since it can provide early warning that an organization is so overwhelmed by debt that it is unable to meet its payment obligations.
Closing and additional resources
Helping your kids learn about and get started investing can go a really long way. I commend you for wanting to help and for taking the initiative.
If you’d like to help your kids get good with money, check out our Teaching Kids about Money course.
If you’re ready to become the CEO of your financial life, check out our DIY Financial Plan workshop.
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