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How to Teach Your Children About Investing

Stocks 101 isn’t typically scheduled after science or art class in your child’s school curriculum. Unless they’ve taken a personal interest in finance during their high school or college years, they may not have the confidence to invest their savings. Where do you go when you don’t know how to do something? For some, it’s Youtube, TikTok, some kind of social media guru, or your standard internet search bar. But this makes it harder to navigate, with an incredible amount of conflicting information thrown at you. 

Are Robo advisors the best option? How do you pick a stock to invest in? Don’t let your adult child decipher this on your own or fall victim to financial buzz. Instead, you should take the time to teach your children about investing options in a safe environment. Read on to learn what you need to prepare your adult children for investing. 

Everything you need to Teach Your Children About Investing

Social media has been a great place to connect, especially when the world shuts its doors. Some turn to it for entertainment. Others use it as an educational tool to teach them anything from the latest gluten-free snack recipes to financial savvy.

However, no stranger on the internet cares about your child’s economic well-being as much as you do. Your role is to teach your children about investing and its decision-making process. And help them navigate the information overwhelm they may be subject to. You don’t have to know all the answers. You just need to help build a strong foundation and give them resources for better learning. 

Pay off debts before investing.

If your adult child is buried in credit card debt, you need to have a different conversation before they can consider investing. The interest that incurs with debt far outweighs the benefits of interest in a mutual fund. If you’re being charged 19% interest on your credit card bill of $100/month and invest $100/month with 6% interest being saved, you’re in a losing battle. 

Teach your children about investing by helping them create a debt-payoff plan. That way, they will be able to transition to a savings goal once they’ve hit their debt-free milestone. Remember, low-interest debts such as a mortgage aren’t what we’re talking about here. Before investing, high-interest liabilities like car loans, student loans, and credit cards should be paid off.  

Build a safety net. 

An emergency savings account should be established before your adult child can begin thinking about long-term savings and investments. Many investment strategies don’t have great “rainy day fund” options that allow you to take out a sum quickly, without penalty. Having accessible cash that covers 3-6 months of necessities is highly recommended. 

That way, your child can make better decisions in the future. And walk away from challenging circumstances since they’ve set aside money in an account. Having a safety net allows your adult child to quit a dead-end career. If they do, it will make them miserable or leave a dangerous living situation without worrying about how they will pay their bills. This savings account will also allow them to earn a little amount of interest.

Create an investment budget. 

Encourage your child to invest wisely after they have an emergency fund. You can do this by developing an overall plan that considers long-term, medium-term, and short-term financial goals. One method is to maintain at least 10% of your long-term assets in a fixed income or cash vehicle (such as a money-market fund) to take advantage of market corrections by rebalancing (to get your portfolio back to the ratio your child planned).

It’s also crucial to discuss investing risk with your child. A potential investor must first determine how much risk they can tolerate before constructing a portfolio that does not surpass that level of risk. If their portfolio fluctuates more than they can take, they are more inclined to sell their investments if they become too worried – which generally occurs after the investments have lost value.

Help them choose their investment vehicle.

The next step for your adult child to begin investing is opening up an account for investments. This could be a retirement account, TFSA, traditional account, etc. The important things to keep in mind when choosing this account are: 

  • Money limits: how much you’re allowed to withdraw and deposit. 
  • Tax implications: if, when, and how much you will be taxed. 
  • Fees: any fees associated with the account. 

This can be the most complicated part of the process that has your adult child giving up and tossing in the towel. Help them understand the pros and cons of each so they can feel confident about how they invest. 

Teach them about investment options.

There are thousands of stock options. But your adult child should understand a few different popular ways to invest before dipping their toes in the investment pool. 

Stocks: A stock is a portion of a company’s ownership. Equities are another term for stocks. Stocks are bought for a share price. They range from a few dollars to a few thousand dollars, depending on the business. 

Bonds: A bond is basically a loan to a corporation or government organization that promises to repay you over an agreed upon time. Meanwhile, you earn interest. Bonds are often less volatile than stocks since you know when and how much you’ll be paid back. Bonds have lower long-term returns and should only be a modest portion of a long-term investment portfolio.

Mutual Funds: A mutual fund is a pool of investments that have been bundled together. Investing in mutual funds allows investors to forego the time and effort of buying individual stocks and bonds in favour of purchasing a broad portfolio in one transaction. Mutual funds are less risky than individual equities because of their inherent diversity. 

Exchange-Traded Funds (ETFs): As a mutual fund, an ETF is a collection of individual investments pooled together. The distinction is that ETFs are acquired for a share price and move like stocks throughout the day. The share price of an ETF is usually cheaper than the minimum investment requirement of a mutual fund, making ETFs an attractive choice for beginning investors or those with limited funds.

The best tool you can give adult children for investing is credible resources that help them explore their financial interests and can answer their questions. Connecting them with your financial advisor can give them a sounding board for their financial decisions and help them grow their wealth, just as you have. 

Are you a financial advisor that wants to help your client set their adult children up for financial success? Read our blog for the top tips and strategies to foster a great wealth-building relationship.