A Letter to Parents about the Power of Compounding,
by Katherine Bateman
Part II - Investing
Once a child understands how to save, they usually want to know if there are other ways to make their money grow. And that’s where investing comes in. Many schools now teach the concepts of investing. When I talk to kids who are just starting their investment program, they usually ask me about “good” investments. This gives me a chance to discuss levels of risk both in investment types and in an individual’s risk tolerance. Only one of my grandchildren, who got $2,000 when he turned ten, had a high tolerance for risk. Through his father’s brokerage account he invested his money in Google, in Coke, and even in a women’s clothing store that he had researched and found was undervalued. Another grandchild had a low risk tolerance. She was always afraid that something would happen to her savings. So she worked and worked and saved more and more and stuck it in her safe, but low-return, savings account. These personality types determine early on the types of investments that will best suit them as adults.
Teaching children about investing is as easy as playing a dinner-table game. What toothpaste does the family use? What laundry and dish soap? What clothing do they wear? Is there one brand that is especially popular at school? What makes it so desirable to their friends and classmates? Where is it made? Who makes their favorite hot dogs and what makes them good? Is it price? Is it flavor? Is it what sells at the ball park? The dashes off to look in the laundry room or under the sink can be disruptive, but the kids are learning how to do investment research.
Why is it good that kids know something about investing? It keeps them in the language loop and helps them understand current events. Key topics in the news today concern jobs, the economy, the stock market, the Fed, the weather. To be a successful investor and saver – whether adult, teen, or pre-teen – you have to know something about each of those topics. When your child studies investments in school and then on her own, don’t be surprised if at age eleven she tells you that the reason her Nike’s cost considerably more this fall than last year is that it flooded in China during the summer.
Finally, if your children have learned the magic of saving and investing by the time they are teens, here’s something they might want to consider: Wait to get a first car until after college. Save $10,000 from gifts and part-time jobs by age 16. Then, instead of paying the expenses of driving a car in high school and college, which costs about $3,000 a year, add that $3,000 to savings until age 21. Then forget about it. At an average interest rate of 4.5%, that $25,000 saved for five years will be worth $200,000 age 65. Just think what they could give to their grandchildren to start them on a savings plan.
Part I - Saving is featured on our Parents/Saving/Articles page.
About Katherine Bateman
Katherine Bateman is the author of The Young Investor: Projects and Activities for Making Your Money Grow, Second Edition. She has been both an educator and a municipal bond analyst. After receiving her PhD at the University of Michigan in Ann Arbor, she taught on the college level for over a decade. She then switched careers to become a higher education specialist in the municipal bond market. During that period she worked with the Securities and Exchange Commission to develop industry guidelines for the municipal market and served as the Financial Advisor to the Illinois Educational Facilities Authority. For information on other books and projects check out her web site at www.kentuckyclay.com.