Financial Security, The Powerful Gift from Parent to Child
Finance is a tricky topic, but if we choose to neglect these discussions, our children will pay the price.
We often reduce financial education down to the age-old rules of budgeting, and we might teach our children to save up money to buy what they want. Sometimes we suggest that they start ventures like a lemonade stand or lawn-mowing business to make more money.
But, do these basic financial aids help our children in the long run?
While money management is key to your financial journey, investments allow you to maximize your future returns. Many often reduce conversations about money with their child to ‘spend less than you earn.’ Limiting your conversation to this can guarantee that your child will need to learn finance for themselves.
Most Americans don’t have $1,000 in savings. As a country, we don’t have emergency funds, and our financial literacy leaves much to be desired. The American dream may include picket fences and security, but our financial education leaves much to be desired.
But, as a parent, you can kick start your child’s financial future.
We have some tips for helping your child see the benefits of investments, and encourage them to make their own decisions:
Be Open About Your Investments
When I turned 18, my father sat me down to discuss the stock market. He showed me the different funds he had chosen to invest in, alongside the growth he’d received over the years. My eyes widened upon seeing the 92% growth rate enjoyed by one of the funds.
Previously, I had little knowledge of how investments could help the average person. I’d heard about the New York Stock Exchange, how the rich bankers would line their pockets with millions and walk away with a trophy wife and a yacht.
Like many others, I held the belief that only the rich could dabble in investments. By discussing how to invest in stocks, and showing the growth enjoyed by secure Index Funds, your child may choose to dip their toes into the world of investments.
With the average index fund in America growing at 7%, your money’s growth will outperform most savings accounts.
Set up a Fantasy Portfolio
Most parents don’t have the funds available to pass their child thousands of dollars to invest. By setting up a fantasy portfolio, your child can start to understand the market without putting personal capital at risk, either theirs or yours.
Furthermore, your child will probably see the tangible benefits of investing. With markets consistently rising and falling, your child is likely to see some huge gains in their time holding a fantasy portfolio. This, combined with education about the impact of compound interest, will make your child unstoppable.
Many apps exist which can help you to practice investing, but I would personally recommend Stock Trainer for Android. It uses real-time data from over 20 international stock markets, giving a realistic experience.
The Magic of Compound Interest
Compound interest is the eighth wonder of the world. If your child takes advantage of its power, it will serve them well. At college, your child probably will not have the sums of money traditionally required to start investing, but that doesn’t limit your scope for education.
If you can teach your teenager that a $100 monthly investment over 20 years at 7% interest can lead to over $50,000 they may well begin their own investment journey.
With this example, you can also teach about debt. While a credit card with an unlimited overdraft may seem like gold to a young adult – it can hinder their future. Compound interest will exponentially grow debt, and your child will avoid lots of future heartaches if they never accumulate debt in the first place.
Teach Your Teen about 401(k)s
Money invested now is a gift, from yourself to your future.
Once your child acknowledges the benefits of compound interest, they may well consider their finances on a long-term basis. If at 25 years old, your child chooses to contribute an employer-matched 6% of every paycheck into their 401(k), they’ll make huge steps toward a financially secure future.
With an average salary of $4,056 each month in the US, this 6% rate of savings can boost the financial security of your teenager for years. For the average American, just $243.36 each month seems a perfectly sustainable number.
Assuming a retiring age of 60 and an interest rate of 7%, your child would have accrued over $700,000 in their employer-matched 401(k). This sits far above the $182,100 average of somebody in their 60s and will set your child’s retirement off on the right foot.
Teach Them to Have an Open Mind
Following my conversation with my father, I watched the stock market with bated breath. Every evening I would plot my profits onto a graph and analyze the importance of the day’s trading. And so, I ridiculed my mother when she invested in property.
“How stupid!”, I thought. My father’s stocks had produced a phenomenal growth that property would never outperform, and so I dismissed it.
More recently, we have discussed the property market again. My mother’s investment brings in a stable retirement income with barely an hour’s required work each month. I definitely can start to see the benefits of the property, and my fixation with the stock market has tempered.
A healthier balance, that’s for sure. A solid investment strategy includes diversity, and by keeping an open mind, I’ve reduced the risk of my investments. Not only does this pay valuable benefits in the stability it brings, but also in the form of a regular income.
In Summary
It often doesn’t matter how you talk to your children about finance, so long as you don’t neglect it. Every day we must encounter the world of finance, and by teaching your children to think critically and invest, their lives will become easier. Thousands of people run into problems every year as a result of their bad financial decisions, and by setting them up with a future of investments and savings, you can give your child a priceless, lifelong skill: financial literacy.
