Cover Parents have the power to ensure their children develop healthy financial habits and a positive relationship with money
Parents have the power to ensure their children develop healthy financial habits and a positive relationship with money
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You can give your kids the lifelong gift of financial wellbeing by building their confidence and empowering them with the fundamentals of money and investing. This month's Wealth With Sophia columns discusses how
Many parents struggle with finding the right ways to explain financial concepts to their kids. However, research from the University of Cambridge shows that our approach to money is largely set by the age of seven. So, it's never too early to start teaching children about money.
There are many benefits to talking to your children about money, which include increasing family financial literacy, helping children to develop important life skills in making informed financial decisions that will last well into their adulthood, and better financial wellness for them as adults. This is something worth investing in.
See also: How your childhood may have impacted your relationship with money–and what you can do about it
Instilling healthy money habits
To help children build confidence about investing it’s important to first ensure you are building healthy money habits and introducing financial concepts early on to help them form strong financial foundations.
Forming healthy money habits is something you can do by talking about or showing your children how you manage everyday tasks such as your bill payments, doing the shopping and how you balance your spending. It’s important to talk about money and share how you have set your own investing and financial goals.
It is equally important to discuss unhealthy money habits with your children, such as getting into too much debt, only spending and not saving, avoiding discussions about money, and not understanding what you have and what you need for future planning.
The good news is that, as parents, we have the power to show our children how to develop a positive relationship with money.
See also: 6 Money Habits To Start Now
Fundamental financial concepts
Some of the most important financial concepts to explain to your children include:
- Goal setting and saving: how to plan what to do with your money and what happens when you save it versus spending it.
- Budgeting: this is one of the easiest financial concepts for kids to understand. Even young children might understand the concept of a budget by how many videos you’re allowing them to watch. The concept of pocket money here is a great way to teach the concept of having a budget.
- Earning: chores are a great and easy way to teach children about the value of their work and earning money.
- Value and exchange: discuss how to focus on value versus price, meaning that rather than talking about things as cheap or expensive it’s important to teach kids to make financial decisions based on whether they are getting good value for what they are paying for something.
These habits and concepts are crucial to building the financial fundamentals and confidence necessary for a child to start thinking about investing and the associated risks.
See also: The spend vs. save dilemma
Enabling investing confidence
Investing may seem like quite an advanced topic to introduce to a child. On the contrary, it’s something you can easily do if you have first introduced fundamental money concepts, then choose visual frameworks and references to introduce fundamental investing concepts that a child can understand.
When you talk to children about investing it's important to explain to your kids that investing involves allocating money with the expectation of earning a return. Highlight the potential benefits of investing, such as the opportunity for an increase in asset prices, passive income generation, and the ability to beat inflation rather than keeping money in savings.
However, the million-dollar question you might be asking is: how do I explain all those concepts in ways that children can grasp? I like to use examples like seeds growing into trees to explain these investing concepts. Introducing brands they know might also be an engaging way to talk about investing.
It’s equally important to educate children about the risks associated with investing. Explain that investments can go up and down in value and that there's always the possibility of losing some or all of their investment. Teach them about concepts to reduce risk including explaining compound interest, portfolio diversification, risk tolerance and patience.
To build their confidence, involve your kids in the investment process. Start with simple exercises like monitoring a virtual portfolio or investing in stocks of companies they know and like, or index funds when they understand the basic concept of investing in a basket of different company’s stocks. Engage them on a regular basis in these investments by showing them the investment account on-screen or on a mobile phone. The key is to keep them learning, asking questions and ensuring conversations around investing are free of financial jargon. Don’t forget that when you are investing in a small portfolio to engage your child, these investment selections should mirror your own risk tolerance and personal situation.
Lastly, instil in your kids the value of learning from mistakes. Investing involves risks, and setbacks are possible. Teach them not to be discouraged by losses but to view them as valuable learning experiences. Encourage them that reflecting on their investment decisions helps them to identify what went wrong, and make adjustments accordingly. We also want to encourage long-term thinking because that’s how we build wealth—you might lose money in the short-term, but over the long-term you have the chance to build wealth, or a forest of trees using a child-appropriate example.
Don’t forget the fun
We must remember with all of these concepts that we do need to factor in some fun, because life isn't just about making money and saving every cent you have. Money has to enable enjoyment in our life, which healthy financial habits can lead to.
It's never too early to start teaching children about healthy money habits, financial management and investment literacy. By giving your kids the low-down on investing you are empowering them to become financially healthy and savvy adults.
Nicole is a co-founder of Sophia. She is also the founder of Next Chapter Raise, Asia’s leading financial education platform for female founders. Nicole is a frequent guest on The Money Makers podcast, which interviews inspiring women in finance and female founders, and co-host of Raise the Bar podcast, which interviews female investors and founders.
This article is part of Front & Female’s Wealth With Sophia series, a collaboration with Sophia, a financial education platform built by women for women, to open up the conversation about money and help drive female financial literacy. The online series covers all things money and investing to enable women to gain the confidence to take control of their wealth creation.
