How to teach your child about investing

From a young age and as they become aware of money, children can easily learn financial tools that will be useful in life. One of the more advanced concepts is the investment. When you decide to explain it to little ones, they should already have a foundation of budgeting, savings, and other financial fundamentals. 

You can start by encouraging your child to save first using a piggy bank and later to have their own bank account (with your help). Learning how to invest is an essential step in building financial responsibility, and teaching investing to a child doesn't have to be as complicated or difficult as you might think.

With examples and explanations, you can teach your little one the financial knowledge he needs for adult life. This means understanding:

• How to Think of Companies as Investments (Stocks)
• How the stock market works
• What is risk through investments
• Where to get the necessary funds to start investing.

Tips for teaching a child about investing 

Start with the basics of money management

In general, a child's financial education should start early, and that means the basics of money (spending, income, taxes, savings) and only then investing. These concepts are quite simple, however, you will need a more hands-on approach to explain them. Only when mastered should you move on to more complicated topics such as asset allocation, risk reduction and portfolio management.

An easy way to start is to include your child in financial conversations and expose them to the most common investments in today's markets: stocks and bonds. Then you can help him learn about investing by discussing compound returns and eventually investing real money.

This does not mean a formal discussion or responses prepared by a teacher. Casual conversations at the table, observations at the supermarket or even chatting while waiting in line for ice cream are perfect ways to teach him about money.

The first step to developing your child's financial intelligence is to talk about money in terms that he will easily understand in everyday life. Let him manage his own money, that way he will learn to appreciate the value of every lei. Give him some "pocket money" and make him responsible for some personal expenses.

Keep it simple by covering the basics of personal finance, like what it takes to make money, how to create a budget or pay bills, or how to decide what things to save for.

Important: Children learn best by example. This means that if you give examples using personal finances (you don't necessarily have to tell them the actual numbers either), you should make sure you illustrate financial concepts that your little one can understand.

Introduce investment fundamentals (stocks, bonds, interest) into discussions

Once your child has a better understanding of what a budget is or what it means to save, it's time to introduce them to basic investment concepts such as bonds vs. stocks, risk vs. reward, diversification, and compound interest. It is also important to emphasize the difference between investing and saving.

Simply put, saving means setting aside money for emergencies or for future use, and investing means spending money to buy assets with the hope of making more money.

When you explain these elements to your child, you will need to keep things simple for them to understand and not overload them with information. Then you can explain to him what stocks and bonds are, how they are used and what risk they involve, how they yield compared to a bank account, etc.

Children love games, and if you want your little one to learn new concepts more easily, you can use investment games like Monopoly or online stock market simulation games.

One of the most important investment principles is "don't put all your eggs in one basket". Teach your little one about the importance of having a diverse portfolio, not investing in just one company.

Explain the concept of capitalization to your child through an exercise

Get him used to ideas about accumulating capital with a view to making a profit later. You can start by asking him if 1 leu is a lot of money. He will almost inevitably say no. Then ask him if 1 leu doubled every day for a month would turn into a lot of money. Watch his reaction as he does this mental calculation and look for other simple examples that would help him understand specific investment concepts.

Also, explain to your child about the trade-offs between risk and reward – investments that have high potential rewards often have higher risks, and it's important to always find a balance that they feel comfortable with that is right for their goals.

Like most things in life, investing takes time. Teach your child that this is not a get-rich-quick, "overnight" scheme. The goal is to invest money and watch it multiply over a few years. From the start, this lesson will give your child more realistic expectations when it comes to investing.

Let him experiment and set some goals together 

To get your little one to save and invest, talk to him about what he would like to do with the money in the future. It doesn't matter if he wants to buy himself a toy or a trip to Disneyland, what's essential is that he has a clear goal. This will train them to keep their eyes on the prize and eventually turn investing into a habit.

If you think it's too early to let your child invest with real money, you can use virtual stock markets to give them a more hands-on but risk-free experience. Ultimately, the goal should be to open a real investment account for the child.