Teaching kids to invest

I’ve written a bunch about why it’s expensive to be poor, why we need better tools for managing money, and how to move from a labor mindset to a capital mindset.  A big takeaway for me is that accumulating wealth isn’t just a functional activity, it’s a mindset that needs to be learned, and taught.

It has taken me a long time — generationally speaking — to begin to figure this out.  Both of my parents grew up poor.  My father grew up especially poor, but managed to break out.  In the 1960s he took a computer programming course and learned to code (50 years ahead of his time!), and then just before I was born he started a small business, which my parents run together to this day.

While this business has been transformative for our family (it sent me to college – I’m the first one on my father’s side ever to graduate), I think it’s fair to say that it hasn’t yet finished the job of helping us relate to money in the right way.  For example, I don’t think I ever really learned, at a young age (or really into my late thirties), the concept of **investing**.  Saving was always a vaguely good idea, but spending was easier, and spending on debt even easier than that.  Basically, I think there is this transition, from having no money, to having some money (but spending all of it), to (in some cases) spending more than you have, to (if you’re lucky) learning how to get money to work for you.

Now that I have kids of my own, I’m trying to think about how to teach them about money.  I want them to learn about budgeting, about saving, and about investing.  I want them to see today’s spending needs/wants as not the whole picture. I want them to learn that if you’re smart about money, not only will you set a solid foundation for yourself, but other good things can happen (e.g., compounding interest).

Here is my v0 approach — no idea yet if this will work.  The primary way my kids spend money (of their own choosing) is on-demand videos.  We have a Roku TV in our living room, and occasionally they rent or buy TV shows or movies.  So, for starters, rather than having them simply ask every time if they can do it, we’re instituting a budget.  The budget is $20 per month per kid.  (that gets you roughly two movies or ten episodes).

The twist is that, at the end of each month, whatever they don’t spend rolls over into the next month — with 20% interest.  So if they spend $10 and save $10, they will roll over $10 + 20% or $2.  So next month they’d start out with $32.  The 20% monthly interest may seem unrealistic and overly generous, but I’m trying to compensate for both the low dollar amounts (hard to get excited about 1% monthly on $5), and also for converting to “kid time” (a month to them feels like a year to us).

I explained the new plan to them the other day (March is our first month), and my heart skipped a beat when my daughter immediately responded: “I think I’ll save most of it”.  :-).  We will see what happens. I am hoping that one of them realizes that the 20% will compound pretty quickly, and decides not to spend any at all.   By my calculations, if they decided to keep 100% of the allowance, by the end of a year they’d each have $950.

I’m curious to know what approaches others have taken to teaching kids about saving and investing.

   

  • Thanks for the piece. I’ve had this same thought this week as my stepdaughter turn 15 and got her permit. She now wants to get a job and I want to impress upon her to save. I think stash might be a vehicle as well

    • yep, makes sense. i’d definitely look at stash too. especially for younger kids, I think it makes sense for parents to “be the bank” to have a little more control and make it more tangible. but at that age I think she’d get a kick out of real investing too

  • Pretty cool idea!
    Would you consider some kind of “matching” if some of the $20 is spent on categories/topics you think are worth spending on?

    • i like that idea – maybe once they get a little older and start spending on more varied things

  • jason wright

    get them to “invest” in each other…in some yet to be thought out way.

  • Rodidds

    This is awesome. When I was younger, my dad gave me a fake money portfolio of $1M and we played “the stock market game”. It gave me a sense for learning how to invest. Education of personal finance at a young age is extremely important, yet it’s a skill that most people don’t understand (at any point in their lives).

  • JLM

    .
    First, teach them to WORK and EARN money.

    Once they realize how hard it is to earn money, they will value it and be reluctant to part with it.

    My No 1 son, the investment banker, remembers well the summers I made him work. He probably has the first dollar he ever earned.

    One year, he put up and took down enormous commercial tents in a Texas summer. He learned about the dignity and nobility of hard work.

    Nobody values or invests money somebody GIVES to them. Make them EARN it.

    JLM
    http://www.themusingsofthebigredcar.com

  • iggyfanlo

    Great stuff.

    I’ve done other thing with my older children. I’ve had the luxury to set aside the full amount for a 4 year liberal arts college education for my children (read most expensive) and then told them that any remainder would be theirs but given to them over time. And then given the very high cost of college education, they start to look at their education as an investment, with a cost, a payoff and an ROI.

    I’ve tried to stress to them that it’s not just dollars and cents, but sense also.

    Fortunately, they see many role models that have “invested” in their education and seen both short and long term payoffs, but I think it makes them think more about that cost/benefit of college and its value.

  • Don’t forget to teach them about charity…

  • Salt Shaker

    I think this is very much generational. As a kid I put my hard earned paper route money in a passbook savings account, which I opened when I was 10. The notion there was an alternative was certainly not in my sphere, and likely my mom’s either. Many became aware of investment alternatives through biz school and years later through their 401Ks. Coincidentally, my 13 yr old niece was bat mitzvahed last week in DC. My better half watched her open envelopes chock full of cash and checks and asked, “what are you gonna do with all that loot?” Without missing a beat she replied, “invest it.”

  • have a look at The First National Bank of Dad – he started with an almost similar concept and expanded it [https://www.amazon.com/First-National-Bank-Dad-Foolproof/dp/1416534253]

    and also Current :) [https://current.com/]

  • Soham Bhatia

    Try FamZoo?

  • i love this. we have always given our kids an allowance and a budget and made them make choices. it started at the levels and ages where your kids are. and has grown a lot over the years. but it is their money and they spend it how they see fit. it has helped them understand money way better than we did at their ages and they are all savers and investors.

    • That’s great

      I suspect there is a magic moment somewhere where they have the first taste of compounding interest, and then that changes how they see everything
      For me it happened when we sold our house a few years ago. 5% annually on a big ticket item really adds up

  • Kirtane

    A little late to the party, but I just came across Common Cents and it reminded me of this post. CC is focused on behavioral economics and using that line of research to teach people how to understand and manage money. They also have apps and games for kids and adults. Seems relevant so here’s a link: http://new.advanced-hindsight.com/resources/

  • This is brilliant. I grew up in literally the worst neighborhood in Canada, but I was extremely fortunate and lucky to have a few things fall into place for me at a very young age. One was a wealthy great uncle who, like you’ve done with your children, got me engage/excited about managing and saving money. And the second, much later in my youth, was my 7th grade school teacher who diverged from our math curriculum for 3 days to teach us the power of compound interest and making your money work for you. Like I said, I was lucky.

    But what I discovered in my teens was that, in Canada, I was not alone. Not in the least actually. It was not common place but I did bump into quite a few other people with similar stories that were either from Canada or Europe.

    I have an hypothesis that education (k-12) and social environment have a role to play in educating young people on the subject of money management. I feel societies that tend to make an effort to share with their fellow human, seem to be more likely to pass on financial tips to one another. They also seem to share these things with their families. This is solely based upon 40-50 encounters so the data set is extremely small.

    In the end, for me.. I love that you are making a clear effort to educate your children how to manage and invest money. You’re literally one in a million. I strongly feel this critical sector of education should not have to fall on the shoulders of parents. This should be included in every students curriculum from an early age.

    • i totally agree that this should be front and center in school, and i’m honestly shocked that it isn’t

      it is really weird that these fundamental building blocks of life are not a major part of the k-12 curriculum

      it’s great that you were able to internalize this at an early age — like compounding interest, i suspect that experience / perspective had a compounding positive effect

      • Yes. It was extreme luck. But massively beneficial and therefore probably the main reason why I am so passionate about bettering k-12 education globally.