Talking to your kids about investing might seem like a challenging topic, especially with the other priorities children have daily, but investing is an important part of becoming financially responsible. The conversation does not have to be difficult if you work it into everyday conversation. There are several ways of doing this.
Include Them in Conversations About Money
Include your kids in any conversations about finances. This helps them get comfortable with money. Make sure they learn about everyday subjects as well as investing topics. You don’t need to prepare formal lessons for them, but you can work these topics into everyday conversations. When you are waiting in line at the store, you can talk about budgeting for food. Give them a chance to digest the information and ask questions.
If you are thinking about investing some of your own money, use this as a learning experience for your kids. If you are planning on investing in real estate, take some time to learn the ins and outs of the process and explain the information to your kids on a basic level. You might be confused by the term annual percentage rate (APR) and what it might mean for you. However, it’s important to know the difference between your (APR vs interest rate), and you can learn the difference in everyday English. That way, you can determine how APY might impact your own finances.
Tell Them About Compounding Interest
Compounding interest can help you earn on your returns, helping you pad out your portfolio. Still, this concept might be difficult to explain to your kids. You can help your kids better understand by teaching them with the penny exercise.
Ask your child if they think one cent is a lot of money. After they say no, you can ask if it would be a lot of money if it were doubled every day. Explain that low returns can still turn into a lot if the money is left to grow over many years. Use this example to show them how important it is to save money while they are young so they will have it when they are older.
Help Them Open an Investing Account
Opening an investment account for your child can give them first-hand experience with the process. There are several options for accounts for minors, and your goals for the funds will play a role in which you choose. An IRA account can be used for retirement savings. While this might not seem like an exciting option, getting kids to get started with retirement savings can be extremely helpful to them.
Compound interest will have as long as possible to start growing. If your child has any income, such as from doing odd jobs, encourage them to set aside a portion for their IRA. Custodial accounts are a common way of helping minors invest. The funds are controlled by the child’s guardian until the child turns 18. Once the child has reached their majority, they will then have access to the funds.
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