If your kids are embarking on their first summer job now may be the time to talk to them about how an investment works. For many grown adults investing is still a mystery and the reason is that when they first started working they were not shown the investment ropes. They never knew when was the right time to learn, so many never did. The right time to learn how to invest is when you start to earn money. For many kids that is the first summer job.
Of course, the amount that kids earn during summer jobs is not large enough to have a great return. However, it is the perfect amount for them to learn exactly how an investment works, to learn the associated risks and the potential gains. Start by discussing with your kids the different types of investment options there are and the pros and cons associated.
If you ask any child whether they want to turn their $1,000 into $3,000 or into $1,100 all of them will say $3,000, don’t expect any better of your kids. It is up to you to educate them on the risks associated with these high return investments and why they may be too good to be true. A long term low yield is likely a better investment for your children. This will show them the benefits of saving and though they won’t be able to access the funds for a while (and the funds really won’t be that high) they will start to see that investment number increase and will love it.
Of course, kids are kids and they may want a short term win too. A good way to start to attract your kids to the world of long term investing is to tell them that whatever extra they earn from an investment, you will match and give to them straight away. This allows them to experience a short term win and a long term gain at the same time.
If they do decide to embark on a riskier venture, let them. This is the perfect time to learn that lesson. They won’t lose too much and they will learn a valuable lesson. Just don’t put a safety net under them. If they lose that money, then they lose that money! Don’t be there to take the loss for them. It was their choice to make.
Two other areas that this will allow you to teach them about are diversification and tax. Diversification is one of the keys to a successful strategy. If you are investing in a sure thing there is still no guarantee that it won’t fall apart. In addition, if you only invest in long term yields you may miss the huge win in a gamble that pays off. By diversifying your investment portfolio you are able to put the majority of your savings in a low return low-risk investment plan and a small amount, that you are willing to lose, in a short term high return investment plan. Of course, whatever they get they will have to learn that the taxman wants some too.
As your child is under the age of 18 they likely won’t be able to open their own investment account portfolio. You will have to do it for them. That is good news. At this early stage, you want to have complete transparency of how they are investing to make sure they don’t have the ability to let things get out of hand. It is important to understand that to some people investing is like gambling. Don’t introduce your kids to gambling their investment by showing them the smart and sensible way to invest.