From piggy banks to stocks: simplifying investing for your children

Investing is a crucial aspect of personal finance that can help set your children up for a secure financial future. However, many people find the idea of investing to be intimidating and confusing. As a parent, you can play a crucial role in teaching your children the basics of investing and helping them make smart choices with their money.

In this article, I will show you ways to explain the concept of investing to your children, so they can start building a solid foundation for their financial future. Whether your child is just starting to learn about money or already has some basic knowledge, this guide will provide the tools you need to help them understand the basics of investing.

Start with the basics

Before diving into the details of investing, it is important to start with the basics. In essence, investing is all about putting your money aside so it will grow over time, allowing you to have more money in the future.

Here is how to explain it in a simple way to your children:

1. Imagine a garden: Think of your money like seeds in a garden. If you plant the seeds and take care of the garden, it will grow into a big and beautiful plant. Investing is like planting your money in a garden, so it can grow and become more over time.
2. Compare it to a toy: Imagine having a toy that can produce more toys. That is what investing is. You invest your money into something, and over time, it increases in value and generates more money for you.
3. Use real-life examples: You can also use real-life examples to explain investing to your children. For example, you can talk about investing in a company they know, e. g. Apple or Amazon. You can explain that when you buy a piece of the company, the value of your piece will go up, and you will have more money. (And please do not forget to mention that it is not always upward with share prices.)
4. Keep it simple: It is important to keep the explanations simple and easy to understand for your children. Avoid using complicated financial terms or concepts, and instead focus on using analogies and everyday examples that they can relate to.

Emphasize the importance of saving

Investing starts with saving. Hence, it is important to emphasize the importance of saving to your children. Teach them the value of putting aside a portion of their allowance or birthday money into a savings account each month. This will help them develop good saving habits and provide a foundation for investing. It is about teaching them delayed gratification.

Here is how to explain the importance of saving to your children in a simple way:

1. Think about a goal: Saving is like working towards a goal, like buying a toy or going on a trip. By separating a little cash each day, you can reach your goal faster and have what you want in the future.
2. Use a jar or transparent piggy bank: You can use a jar or transparent piggy bank to help your children visualize their savings. Encourage them to put a little bit of money into the jar every time they get some and watch as the jar gets fuller and closer to their goal. For example, you can put extra money in the piggy bank every week and teach the concept of interest at the same time. Transparent piggy banks are best, so your child can see directly how their money is growing.
3. Teach about needs vs. wants: Explain the difference between needs and wants, and how saving is important for both. For example, you need to save for things like food, shelter, and clothing, but you can also save for things you want, like a new toy or a trip. In this context, you can also take an excursion in the direction of budgeting.
4. Make it fun: Encourage your children to make saving fun by setting goals, using their imagination, and using piggy banks or jars to hold their savings.

Discuss risk and reward

It is important to explain to your children that investing involves risk. Stocks can go up or down in value, and there is always a chance that they could lose some of their money. However, there is also the potential for high rewards if they make smart investment choices. Encourage your children to think about their long-term goals and how investing can help them reach those goals.

Explaining the concept of risk and reward to a child can be done using everyday examples and analogies that they can easily understand. Here are a few suggestions:

1. Play a game of chance: You can use a simple game of chance, such as rolling dice, to explain the concept of risk and reward. If the dice roll results in a high number, the reward is greater, but if it results in a lower number, the reward is lower or a loss. This helps your children understand that there is always a chance involved when it comes to getting a reward.
2. Use food examples: You can explain the concept of risk and reward using food examples that your children can relate to. For instance, you can explain that if they choose a healthier option like fruit for a snack, the reward is a healthier body, but if they choose junk food, the reward is temporary pleasure, but it also increases the risk of negative health consequences.
3. Tell a story: Telling a story can be a fun and effective way to help your children understand the concept of risk and reward. You can tell them a story about a character who takes risks and faces challenges and then discusses the rewards and consequences of those actions. This can help your children understand that taking risks can lead to great rewards, but it also involves some level of uncertainty and the possibility of negative outcomes. By understanding the concept of risk and reward through a story, your children can start to see how it applies to their own lives and future decisions.
4. Use real-life examples: You can also use real-life examples of investments to help your children understand the concept of risk and reward. You can explain that investing in a savings account has low risk and a low reward while investing in stocks has a higher risk but also a higher potential reward. (If it is possible for you and your child is old enough, you can also use your own portfolio for this purpose. Yes, I know that this is subject to some challenges. BUT: You will not find better examples!)
5. Encourage questions: It is important to encourage your children to ask questions and engage in discussions about risk and reward. This helps them understand the concept better and gives you the opportunity to address any misunderstandings or misconceptions they may have.

Teach about diversification

Diversification is an important aspect of investing, and it is important to explain it to your children in simple terms. Diversification means spreading your investments across different types of assets, such as stocks, bonds, and real estate. This helps to reduce the risk of losing all your money in case one type of investment does not do well.

1. Think about a basket: Imagine you have a basket with all your eggs (money) in it. If you drop the basket, all your eggs will break (you will lose all your money). But, if you put your eggs in different baskets, if you drop one basket, you still have the other baskets with eggs in them (you have not lost all your money). That is what diversification is like.
2. Make it a game: You can make a game out of diversification by giving your children a set amount of “money” to invest in different types of investments. With the opportunities that the internet offers you, you can do this virtually without any problems. Use the appropriate websites and create a portfolio in MS Excel. Map the assets and see what happens by updating them regularly.

Encourage practice

Finally, encourage your children to practice what they have learned about investing. Provide opportunities for them to invest small amounts of money, such as in a savings account or by buying a few stocks. (My idea is that – once my daughter is the right age – I plan to do a stock investment together. From the selection of the stock to the purchase and monitoring.) This will help her build investment knowledge and skills.