You can save or you can invest. It is a distinction that many adults struggle with as a concept. How then can kids understand the difference, and why is it so important?
Most kids who are introduced to the concepts of money tend to be conservative. They like to hoard as much of their money as they can and save up for things. That is a great phase that can be utilized by parents, caregivers and teachers to teach the value and the responsibility of money. Unfortunately, most kids do not get any instruction past those initial lessons.
Many experts advise that children should be taught that their money should be divided into three pots: Save, Spend and Give. A certain portion of the money is put into each category. While these are nice simple divisions that most kids, even the youngest ones, can understand, they leave out a big part of money management, a fourth pot: investing.
Why is teaching about investing so important? Money makes money grow. Skipping this step means that your children will never learn how to increase their money. Just putting money into a piggy bank or under the mattress is a lost opportunity. Plus, when you consider inflation rates, you can actually lose money this way, since most savings accounts do not have interest rates that keep up with inflation. It is hard to create wealth just by saving.
Savings is generally secure. Your money will always be there for emergencies. However, when you invest, the money will work to earn more money. By placing a portion of your money where it can work for you, you can create wealth. You might do this by investing in a business, the stock market or a commodity, such as gold or silver.
Of course, investing can mean other things as well. For example, investing money in an education can be a good idea, since people with more education and skills make more money. The investment is in yourself, and it will bring you a higher return, a good value.
How can you explain these concepts to kids? Use real life examples from their own worlds. Investing is all about putting your time and your assets into a project that will return the best rate of value. Investing in the time to study for a test or learn how to throw a curve ball can pay off both immediately and down the road.
Investing can also have its risks. For example, a child can invest in the ingredients for the standard lemonade stand, but if the weather doesn’t cooperate or no one is thirsty, the investment might be lost. That is why it is good to have your money and time in multiple investments, some that are very secure and others that are a bit more risky.
Saving and investing lessons that children should be taught include the following.
It is important to first establish a savings account that can be easily accessed and used for emergencies.
There are a number of different accounts that you can choose for savings. They will earn a little interest and include standard savings accounts, CDs and money market accounts.
You want a portion of your money to be invested, where it can work for you 24/7.
The sooner you start investing, the more potential your money has to grow.
Even the smallest amount of money, let us say $30, can be invested for a good return.
Before investing in a business or a project, do your research. Adults can consult with a financial planner, and both kids and adults can check out various companies online before making an investment.