The Best Time to Learn about Investing is When You Are Young
It is often amazing to discuss how ill prepared we are for all of the lessons that Life throws our way. No one gives you a “Guidance Manual”, although our educational “servitude” is supposed to give us a foundation upon which to build upon. However, one lesson that seems to fall through the cracks, so to speak, is the art of saving and then investing for a return. Since this subject matter seldom appears in a classroom text, the responsibility for mentoring in this area falls upon the adults in the family.
Adults should not take this responsibility lightly. Getting your offspring to appreciate the importance of saving for a rainy day or for the future is one of the best bits of advice that can result in a prudent habit for a lifetime. As your child begins to fathom the mystery of mathematics, then the opportunity for a valuable “teaching moment” transfers to the art of investing, the choices one makes with their savings in order to reap a reasonable return. Saving and investing go hand-in-hand, and the sooner we are taught the basics of the entire process, the better our chances down the line when real money is involved.
The best way to introduce a child to savings is with something they can see, touch and feel. A simple savings account at a local bank serves this purpose. As the principal increases, the issue of interest returns will logically arise, and your young one will wonder why the amounts paid by the bank are so meager. Wait for this query, since lessons are better learned when they are lived, and this question will then lead to the art of investing and what you can do with your hard-earned savings. The following diagram can start the discussion:
The “Risk Pyramid” organizes the various types of investments in one tidy picture. The items at the base of the pyramid offer low rates of return, but greater safety. As you move up the pyramid, the types of investment get more complicated, more risky, but could give a higher return. Lastly, the “red” region contains high risk items that require specialized training before anyone should attempt to use them.
For beginners, it is always recommended to start from the bottom “green” area, the reason a savings account was suggested earlier. The younger the child, the easier it is to grasp anything about cash since it is used in everyday life. Raising the bar a bit to include Government Bonds has always been an accepted way of teaching the time value of money for aspiring young investors. Buy a few bonds as gifts, and once again, the classroom is in session.
Our government has tried to make this process easy to understand by dedicating a special website address - TreasuryDirect.gov - for this purpose. As the site attests, “U.S. Treasury securities are a great way to invest and save for the future.” All manner of securities are covered with overviews for each, especially the various savings bonds that are great for kids that can also be purchased online. There is also a “Kid’s Section” with informative videos and games that teach how money can accumulate over time as interest is compounded. If your children are older, there is also a separate section entitled, “Money Math: Lessons for Life”. It is a four-lesson curriculum supplement for middle school math classes, teaching math concepts at the seventh through ninth grade-level using real-life examples from personal finance.
It is never too late or too early to begin learning about savings and investing. Teaching your children the basic principles at an early age can be the beginning of healthy habits for their future well-being.
This article is a guest post from the writers at Forextraders.com, a firm that specializes in the investment markets with a focus on foreign exchange. The company has experienced online forex professionals that provide expert advice, educational tools, forex market commentary, and best practices guidance for members of its online community.