What is the best way to explain investing to a child?

What is the best way to explain investing to a child?

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It takes a lot more than penny jars to prepare children for their financial future - education is key and there’s plenty to learn about putting money away for their adult life. Investing remains one of the recommended long-term saving strategies, but how can you explain the process to a child? We’re here to help.

 

Begin by explaining the value of money to your kids
Make sure your kids have a solid understanding of the value of money and how a strong financial support will benefit them when they’re older. Practical lessons are the best way for your children to learn about money, so why not start giving them pocket money for the chores they complete? You could even allow them to take responsibility for managing their own pocket money, as long as they save a bit of it each month.

You could also turn your money lessons into games. For example, you could ask them to attach price tags to different items around the house, based on how much money they think each item costs. Once they’re finished, you can compare their valuations with the actual cost of the items, to give them an understanding of how much or how little different things cost.

Once they’ve got to grips with lesson one, you can move on to the more detailed discussion about investing.

 

Start with savings
Teaching your kids about savings is a fantastic first step into the world of investing for them, so make sure you explain to them how saving works.

One thing you could do is open a savings account or a Cash ISA for them. It’s a practical way of encouraging them to save their pocket or birthday money, whilst also showing them how their pot of cash grows over time. Once they understand the importance of saving and the interest they could earn from it, you can then begin to delve further into the more intricate areas of investment.

 

Little and often helps to build a pot of money
Although interest rates are fairly limited when it comes to cash savings, seeing even the smallest amount of money being added to their savings over time will help them understand how investing works.

 

Break the topic down using examples they will understand
Investing can be hard to understand, but many parents find that the lemonade stand is a classic analogy that children can make sense of.

In order to sell lemonade, you would need someone (an investor) to give you the money to buy the stand and the ingredients to make the lemonade in the first place - in this case, mum and dad. After setting up the stand and selling your first few glasses, you would have the chance to give some money back to mum and dad, as well as making some money for yourself, all whilst having some money leftover to buy more ingredients for more lemonade! 

This simple life lesson tells them exactly how investing works - people will give money to companies and buy shares in the hope of making a gain later in the future.

 

Explain property investment with a healthy snack!
Describing mortgages to children using physical objects is a perfect way to keep it simple. Take an orange and give it to the child, as an engaging way to symbolise the bank giving all the money upfront to pay for a house. Ask your child to separate out the orange segments and give you a segment back one at a time - this represents the gradual repayment of the money borrowed from the bank. And you could later explain how interest would come into play.

 

How about a round of Monopoly for some safe practice?
Monopoly is without a doubt, a household favourite when it comes to fun-filled family board games, but you might also find it useful when teaching your kids about investing.

As a real estate trading game, Monopoly is essentially a simplified version of some of the real world practices investors will use in the market. Once they get to grips with the ins and outs of the game, you can help them understand that some of these practices are what investors would use in a real life situation.

From spreading your assets out across the board and investing time and effort as well as money, to keeping an eye on cash flow and paying attention to prices - Monopoly is possibly one of the best ways to keep kids intrigued when explaining investing to them.

You’ll also find that The Game of Life is another great family board game for lessons in investing. This game requires players to make their way along the path of life, making decisions as they go, as well as creating a family, earning money, investing in property and collecting rewards along the way in order to win.

 

Alternative resources you might want to try out

  • The Little Red Hen - A fictional story telling the tale of a hen who invested a lot of time and effort over the long-term, to turn wheat into bread. This is perfect for introducing younger children to the world of investing.
  • The Moolaverse from Playmoolah - An app which allows kids to track savings and make important decisions about their own finances.
  • Moneytree Workshops - A variety of different workshops from Moneywise, tailored to children within different age ranges and focused towards teaching them about various financial concepts.
  • How the Market Works - A game consisting of a virtual stock exchange, where you and the kids can have a go at trading and investing.

 

Save the technical jargon for a later date
To avoid a mind-numbing conversation that they probably won’t take in, it’s best to leave the technical jargon for when your kids have grasped the basics of investing. Avoid terminology such as stocks and shares, equity and interest rates, to name a few - details such as these can be explained closer to a time when they’re ready to put their investment knowledge into practice.

 

Use a safe environment to try out investing together
For a more adventurous lesson, why not start investing with your child? With a Junior Stocks and Shares ISA, you can invest up to £4,368 every year (subject to change) in a tax-efficient way. The money within the account is owned by your child, meaning nobody can dip into their savings. Your child’s funds are also locked away until their 18th birthday. Once they’re 18, they gain full control of their money and their account will automatically become a Stocks and Shares ISA.

Thanks to robo-investing platforms, like Wealthify, opening a Junior Stocks and Shares ISA is a lot easier than you might think. All you need to do is choose how much to invest and the level of risk that suits you and your child. From there, the hard work is taken care of by investment experts.

Paying into a Junior Stocks and Shares ISA is a great way to teach your kid how to take responsibility for their own money and it allows them to put what they’ve learnt about investing into practice.

Educating your children on investments may be a challenge, but it is so worth the effort. We never know what’s around the corner, so it makes sense to plan ahead and to stick at saving for your children’s future, all whilst teaching them habits that’ll help their financial future.

 

The tax treatment depends on your individual circumstances and maybe subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

Investing is for everyone.
Including you.

Wealthify is the new way to invest your money.

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