There are some conversations with your kids you don’t really look forward to. “Mom, Where do babies come from?” is certainly one of them, as are the topics of safe sex, disease, death, and – yes – investing.
But the more experience I have under my belt as a mom, the more confident I am that even the most difficult, complex subjects can be simplified enough so that young children can understand them. In fact, the very need to simplify a complex topic so that a child might be able to grasp it makes many difficult topics much easier to explain. When you get rid of the subtle nuances that complicate adult behavior and interaction, what remains is often straightforward and not too difficult to understand.
Take a recent conversation I had with my ten years old daughter about investing. She had overheard her dad and I talk about our investments and about inflation, and wanted to know what inflation meant, why we were worried about it, and why we needed to invest our money to fight it.
At first I was taken aback by the complexity of the topic. How do you explain inflation and investing to a ten-year-old, when plenty of us grownups barely grasp the complexities ourselves? Then I reminded myself: Keep it simple, stick with the very basics, use examples from the child’s own life, and all will be well.
So this is what I said:
“Suppose you get a $100 bill for your birthday. This is a nice gift, right? You can use it to buy maybe 3 Nintendo games. But you decide that you don’t need any new games, and you put the money in an envelope and eventually you just forget about it. 30 years from now, you’re 40, right? And you suddenly find that envelope tucked into one of your old books. You take the $100 bill out of the envelope, but you don’t get excited at all, because 30 years from now, $100 will not buy you 3 games. It will buy you 3 pieces of gum!”
As she looked at me in disbelief, I continued, “This is inflation. Inflation means that the same amount of money will buy less and less as time goes by. That’s why we can’t just put money aside. Unless we plan to use money soon, we need to put it someplace where it will grow. And putting your money someplace where it will grow is called investing.”
I continued to explain that once you decide to invest the $100, you have a few options. You can put the $100 in the bank and grow it just enough so the same $100 will still buy you 3 games 30 years from now. Or you use the $100 to buy a tiny part – a share – in a company, and as that company grows, your $100 will grow too, and in fact chances are that 30 years from now, they will grow enough to not just buy 3 games, but maybe 6 games! So you will not just fight inflation, but also make more money than the amount you started out with.
Admittedly, this was a very simplistic and somewhat inaccurate explanation of the concepts of inflation, saving and investing. For instance, I don’t know if 30 years of inflation will mean that the $100 of today can only buy 3 pieces of gum in 2040. But it was something that a ten year old could understand and relate to. And it enabled me to spark her curiosity and interest about the power – and the importance – of investing.
David’s Note: I used to be REALLY bad at explaining complex subjects, because I would literally try to talk about every detail and intricacy of the concept until no one is paying attention. As time went on, I realized that using a story people can relate to, even if it doesn’t 100% fit the subject at hand makes the explanation much easier to digest.
Nowadays, I almost always use a story to explain a topic, which is similar to what Vered did with investing.
But how about you? How do you explain complicated concepts to your kids? And what do you think is the best way to get them to become interested about money?
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I am currently researching the latest information on how and when to educate children about money, finances and investing. There are so many resources out there now, it is challenging to wade through them and find the best. If anyone has suggestions, I would love to hear them.
My goal is to contribute (with my time) to the financial education of my grandchildren (currently ages 3 and 6) – with the buy in and support from their parents. Unfortunately we are not in the same geographic area – which makes it harder.
I am hoping to find or develop a by age spreadsheet or checklist that tells me appropriate personal finance concepts to teach at each age. I understand that each child will be different and have their own best ages for learning, but feel that a general guideline document would be helpful.
I am also interested in hearing about how the various generations have been trained in personal finance topics – and how you trained (are training) your children.
Great post. And very thought provoking. I’ve always been a firm believer that we should teach kids the basics of money in school; from simple things like opening and operating a bank account, simple saving through to more complex topics such as calculation ARR on a loan and properly understanding a mobile phone [cell phone if you will] contract.
My kids (aged 4 and 6) have bank accounts and we do make regular trips to deposit some of their pocket money. We also make sure that they choose a charity to donate some of their pocket money to – the rest they can spend and save as they wish.
Keep up the good work.
I have 5 kids (ages 4-14) and I hope and pray they become investors instead of spending everything and then going into debt. When they get paid their commission for doing work around our house, or for work they do for others, we have them divide their money into different envelopes: some for giving, some for spending, and some for saving and investing. Little by little, I’m encouraging them to think about each choice to buy something now as also a choice to invest that money for their future.
It still amaze me when kids asks about complicated adult stuffs like that on investing. little minds with big curiosity. You see investing is not for adults only. Kids also have their minds on saving up say for a new toy or a new book to read. Narrowing down the complex ideas into a simple child language is indeed a good way of explaining to a kid how this things work.
The best time to start investing is at a young age. Warren Buffett started at 11 and became a billionaire. If you start early enough then you can become rich with only average returns.
10 years old? I think that’s way too young to learn complicated concepts like stock and inflation. I would stick with really basic concepts like saving, being frugal and work on building a good moral compass.
Good plan – keep it simple to convey the main message that if you do nothing with your money, it will become worth less and less over time. Keep it simple and it is amazing what kind of an impact you can have. Now even I understand what inflation is. 🙂
That is a very effective way to explain to kids Vereed. I envy you on that aspect as I can’t explain well to my kids subjects that are complicated. I usually tell them, ask your mom. LOL. Moms usually can explain complicated matters to kids than most Dads.
I think a lot of it comes down to patience. The good news is that the more you try to explain, the better you get at it so keep trying.
I’ve often thought about the best way to go about teaching my kids about investing, and I think just being up front with them is the best solution. I don’t want to dumb it down for them, I want them to really grasp the concept. I remember growing up when I learned that something was more complex then it was initially explained to me I would get angry that no one had though to give me the whole story in the first place and keep me in the dark about it.
It will probably end up with my kids sitting next to me watching me research a company, and explaining what each financial term means. I’d also like to let them research a company on their own eventually, and let them have some of their own money to invest.
I’ve found that “teaching” kids anything can be a challenge when it’s done overtly and seems to work better when it’s organic or they learn by experience. We discovered threejars.com from Jean Chatzky and find that for us at least it is a great way for kids to experience money in a way that makes the learning fun. It encourages saving and budgeting. However you choose to teach these lessons, it does seem that the earlier you start the better.
Interesting insights and as you rightly mentioned, the explanation may not have been completely accurate. But, i think is important that kids at least start getting a hang of what things like Saving and Investing mean.
It is critical that kids start realizing the value of money from the beginning. Once that happens money management will be easier when the need arises later on in life. I was always good at saving money but then I never really learned to managed my funds growing it up. Now i often feel the pain.
You’re making a good point – saving is not enough. You need to know what to do with the money you save.
I would add though that saving is an EXTREMELY important first step. Without the initial savings, it’s almost impossible to accumulate wealth.
So before anything else, save more.