Financially savvy adults know that saving and investing for the long term brings the greatest rewards. That's why so many parents open bank accounts for their children. However, opening an account for a child is only the first step toward helping them build wealth. The second step is getting children to understand and then participate in their financial future. As Benjamin Franklin said, “An investment in knowledge pays the best interest."
“I prefer to call it 'raising adults' not 'raising children,' and that includes making sure your kids understand how money works," said Alan Wolberg, manager of wealth planning at City National Bank. “Training your kids to manage their finances is a lifelong endeavor that should start when they're as young as possible."
More than half of the respondents (57%) said neither of their parents had taught them about money, according to a 2021 survey by the National Financial Educators Council. But researchers have found that habits, especially those related to money, can be set as early as age seven.
To get your kids interested in investing and money management, they need to understand that money is power, not a commodity, said Wolberg.
“The reason most people are interested in money isn't just because of the cash, it's the goal that they want to attain with that money," said Wolberg. “Your money has to work for you. So, when you have little kids, you start with little goals."
Wolberg suggests teaching kids deferred gratification, so they understand they need to save for something they want.
“You can start by assigning them chores and giving them an allowance that is insufficient for their goal such as a special toy, a new bike or skis," said Wolberg. “They learn that they have to work for their money and that they have to save for the things they want."
It can be especially hard for higher income parents to stop buying everything for their kids, Wolberg acknowledged, but the financial lesson of deferred gratification is important. While providing for your children can be rewarding, teaching them to provide for themselves can provide much more long-term value.
“To get your kids as adults to be responsible stewards of their money and to pay attention to their investments, you need to start with them setting aside 10% of their allowance, then 10% of everything they earn at their first job and then to maximize their 401(k)," said Wolberg.
Introducing your kids to money through goal setting and delayed gratification is the beginning of a journey to a healthy financial future, including investing. An RBC – City National Bank survey done in 2016 found that more than one-third of American adults (35%) received no instruction on investing from their parents, their school or someone else. Another 39% said they taught themselves about investing.
However, recognition of the importance of financial education seems to be growing. The poll found that 29% of Millennials said they learned about investing from their parents and 22% said they learned in school. Among Baby Boomers, just 10% said they received investing education at home and 9% said they learned about investing at school.
For Wolberg, teaching a child about investing is important no matter how wealthy their family is. Teaching a child about all aspects of investing — from the time it takes to grow money to how much they should invest — is a key part of protecting their financial future.
“In many cases, the children of wealthy parents don't need to take risks to achieve their financial goals, so they may not ever be taught about investing," said Wolberg. “However, children of wealthy parents still need to learn about the time horizon required for investing. All children need to understand that if they don't have the money to achieve their goals, they need to learn to save and invest."
For high-net-worth families, it makes sense to spend time and money on financial education to prepare kids to manage their inheritance, said Wolberg.
“That's much better than having them lose or misspend their money or to spend a lot of money on lawyers to keep the money under control," said Wolberg.
Additionally, learning how to invest at an early age is important for children from all backgrounds. Depending on the age of your children, here are eight options to get them ready to invest:
1. Teach them Budgeting 101: A weekly or monthly budget – or an envelope or piggy bank system – can help even young children understand how to separate funds into categories for saving, sharing and spending.
2. Talk about money: Children often have confused perceptions about how much money their parents have and how they manage their money. Share what you can about your financial decisions to help them understand concepts such as investing and philanthropy. Explain why you chose a specific investment or why you keep funds in various accounts and how they work.
3. Connect investing with long-term plans: A teen may be thinking about a future business she wants to start or an extensive trip he wants to take after college. A quick explanation of the power of compounding with a specific dollar amount and a distant date can illustrate the importance of investing for the future rather than for a quick profit.
4. Provide a savings incentive: Just as many businesses offer a matching contribution to a retirement fund, you may want to encourage your children to save by matching the money in their savings accounts or other investments to encourage them to save more.
5. Show them the fun side of investing: The Stock Market Game is one of several games that parents and kids can play together to teach kids about how investing works.
You can also ask them to choose a business they are familiar with, such as a streaming service they use for movies, the maker of their computer or the company that makes their favorite snack. Then, do a little research to follow the ups and downs of their stock.
6. Open an investment account with your older kids: You can expand the exercise above and buy a few shares of a company's stock or open a shared investment account. Using this account, you can teach your teenager or young adult about how to analyze a company or a portfolio.
7. Introduce older kids to your financial advisor: Most firms offer financial literacy classes for young people, said Wolberg.
8. Establish a family charitable trust: Grandparents and parents often establish a charitable trust that requires regular distribution of funds to one or more causes, said Wolberg.
“Putting older kids on the board or including younger ones in family meetings introduces them to philanthropy and helps them understand the connection between money and causes they care about," said Wolberg. “They'll also learn that prudent investing will make a difference in how much is available to donate. Managing money on behalf of other people can be inspiring."
Whatever you choose to do, Wolberg said, the important thing is to start when your children are as young as possible. The benefits of a long time horizon are clear for teaching financial literacy as well as for investments.
Reach out to our wealth planners today to learn how we can help you and your family explore what financial options to consider.
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