Children should be taught about investing. They need to be taught that much more than savings, investment also matters. For children to be able to understand investments, they should be taught in ways that correspond to their age and their interests.
Investment can simply be defined as the purchase of goods that are not consumed today but are used in the future to create wealth. It can also mean a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for profit.
Saving is good but Investing is better
We all need to understand the relationship between saving and investing. The act of saving should be the first lesson to teach your children before investment. Plenty of parents start their kids off with a piggy bank to teach them the importance of savings. However, very few teach their children how to invest.
You need to teach your kids the essence of saving because the money they save will serve as the capital for the investment. For long-term success, investing has to be the next step. This will help them avoid debt, keep them responsible and boost their confidence.
How then can you raise a child who is an investor
You might be tempted to put off investing discussions until your child is grown up and has money to invest.
Investments take many forms. Young kids might have a hard time understanding the concept of the future. It is best to teach them by relating it to something easy to understand and fun.
You could start off by getting books that teach financial intelligence. Get a copy of The Little Red Hen and read it to your child. In this story, the hen invested the time and effort to turn wheat into bread—sowing the grain, harvesting it, and making the dough. The lazy animals who were her friends blew her off and did not help until it was time to eat. She refused to share her bread with the slackers, and everyone learned a lesson. This is an example of thinking long term.
Help your child plant a garden or put some seeds in a flowerpot. Talk about the time the plant needs to grow and the water you need to “invest” in it so that you get a beautiful plant that blooms.
Here is how investment works
The interest we can get from bank accounts is very low so investing is a way to make your money go further.
For example, a 10-year old who stashed N1,000 in a high-yield savings account earning 2% would have close to N3,000 by retirement age. Alternatively, if they earned 7% a year by investing that money over the same time period, that deposit would grow to more than N41,000 by age 65.
Once kids understand interest, they can take on investing and the stock market. They’ll have the ability to earn even more if they can understand the following concepts.
Stocks vs. bonds: When you invest in a stock, you are a partial owner of the company. Alternatively, when you buy a bond, you are lending money.
Risk vs reward: If you take on more risk, the rewards tend to be greater over time. However, the likelihood of losing money increases as well.
Time horizon: Saving for something six months down the road is different than saving for something five years from now when it comes to investing. While stocks may sink from time to time, over the long run they go up.
Diversification: Investing in a few companies reduces the risk compared to investing in a single stock.
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