Teaching Your Child How to Invest

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Most people teach their children about saving money, whether by using a piggy bank or a youth savings account at a financial institution. The following are some of the basic ways to get children involved in saving their own money.

  • Open a basic savings account for them or with them such as a Young Savers Account from BancorpSouth. As they earn more money, you may want to introduce them to other investment vehicles, such as money market accounts, certificates of deposit, and even mutual funds.
  • Create a matching program with your children, much like a 401(k) program. For example, every time they put $20 into a savings account, you will match that with $20, and so forth. This will encourage them to save and to understand how certain investment accounts work as they consider options later in life.
  • Set up an education fund with them or for them.

Once your children have a general understanding of how to save money, and why it is important to do so, it is then time to talk with them about how to earn money through accumulating interest. Discuss how interest works and why it is important to start saving when they are young.

A great way to help your children understand the value of saving money while they are young is to explain the concept of “compounding” interest. In simple terms, compounding interest is when interest is calculated not only on the initial principal amount in the account, but also on the accumulated interest of prior periods. Let’s take a look at an example of how this might work when $1,000 is compounded over time:

Year
4%
6%
8%
10%
10
$1,481
$1,791
$2,159
$2,594
20
$2,191
$3,207
$4,661
$6,728
30
$3,243
$5,743
$10,063
$17,449

Source: U.S. Department of Labor

Once you have discussed these topics with your children, you must continue to check with them and stay involved in the process. Most children look to their parents as the primary source of income, so the more you help them in their learning process, the better. Don’t give in and just give them what they want; help them continue to understand how to earn their goals and provide ways for them to do so. Review their financial statements with them each month, and help them to understand how to read them, showing them how much money they have earned on a monthly basis.

Most important, however, you must practice what you preach. You must continue to save and allow them to see how you are working through your finances. Let them look at your monthly budget and how you utilize funds and save money each month. Remember, their best and most important teacher is you.