When you stop and think about it, money is a complicated topic. For parents, it can be hard to know where to begin teaching your kids about money. There’s a lot to learn and it’s important you start with the basics. As adults, we’re frequently focused on investing for retirement. However, in our opinion, you need to teach your kids the fundamentals of financial literacy before embracing more complex topics like investment strategy. SageVest Kids offers advice on when and how to teach your kids about investing, including how to invest money for college, and when to allow your kids to begin investing on their own.
Teach Your Kids How to Save Before You Teach Them How to Invest
In order to invest, you have to have the money to do so. This means you have to save. Teaching your kids how to save money is the most valuable lesson you can impart to help them achieve wealth success in the future.
Parents frequently tell us that their kids are great savers … because they don’t spend a dime of their own money! Stop and think about this: What does spending your money teach your kids about saving? The answer is nothing. In order for your kids to really learn how to save, they need to learn how to budget their own money.
SageVestKids strongly encourages parents to let kids manage age-appropriate elements of their financial lives, starting small at young ages and increasing in responsibility as kids grow older. Your child needs to learn how to make a budget work, including learning from their mistakes, learning how to save for large expenses, and ultimately, learning how to save for the future. Only once they’ve thoroughly grasped these important principles is it time to teach your kids about investing.
Teaching Your Kids When to Invest Savings
A fundamental investment rule is that you should only invest monies that have at least a five-year investment horizon. Monies needed sooner than this might not be able to sustain volatility or downturns in the markets. You never want to have a cash need that can’t be met because the markets have declined.
The problem is that five years or more is a long timespan for kids 14 or younger to contemplate. Furthermore, by then, college is likely on the horizon, making their college savings a precarious investment pot to use for educational purposes.
For all these reasons, we typically recommend only talking about investments relative to your own financial plans while your kids are still at home. You can share information about how you invest for the long-term, following a disciplined investment approach. You should also explain how to make wise decisions regarding what should be invested (e.g., retirement savings), versus what shouldn’t be invested (e.g., savings for your summer vacation).
Involving Your Kids in Their College Savings
We strongly advocate open and honest communications with your kids about college savings, preferably by age 14, if not earlier. Discussing well beforehand who’ll be paying for college, including amounts, allows your kids to gain a clear understanding of the financial responsibilities they’ll need to assume in the future.
We often recommend Section 529 plans for college savings, given their preferential tax treatment. Most plans offer age-based investment strategies that become increasingly conservative as your child’s college investment horizon draws to a close.
You might elect to share college saving statements with your kids, depending upon their level of financial maturity and how you think such information might impact their own college savings incentives. However, keep in mind that investment exposure relative to their college savings could end up being a positive or negative experience, depending upon how the markets perform. If you do choose to share college investment information, be sure to discuss how the investment strategy for their upcoming college cash needs differs substantially from the longer-term investment strategies required for retirement.
Teaching Your Kids About Investing on Their Own
When your kids eventually begin earning money that doesn’t need to be committed to college or other short-term goals, it’s time to get serious about teaching your kids about investing. Your discussions should include the following key investment points:
Always Save for Retirement
You should strongly encourage regular savings once your kid’s established in a job. Every working adult, regardless of age, should commit a portion of their earnings toward long-term retirement investments and savings. The power of investing early can be astronomical over a period of decades.
Appropriately Segregate Investments
Savings for short-term goals e.g. a home or car purchase should be segregated from long-term investments, remembering that any monies invested need to have at least a five-year investment horizon as all investments are subject to risk.
Be Aggressive and Be Diligent
A fairly aggressive investment strategy is often wise for the portion of a young person’s savings that’s earmarked for their future retirement needs. However, the caveat is that you must educate your child about maintaining a long-term disciplined approach, and avoiding selling when the markets are low. They need to know that rebalancing investments and buying low on dips are the fundamental keys to investment success.
SageVest Wealth Management is the creator of SageVestKids. We help individuals and families to achieve their investment and financial objectives by integrating investment management and financial planning services under one roof. Our commitment to the financial wellbeing of our clients and their families extends to educating the next generation about money. Please contact us if you’re ready to get serious about your family’s financial future.