Tell Your Children About Their Financial Superpower!
Share with them about their Power of 16
My friend Scott Yamamura recently gave the TEDx talk below on talking to your children about finances. Check it out! (It’s around 7 minutes in length.) The video is a nice introduction to his book, Financial Epiphany: Discover Your Ability to Multiply Money and Reimagine Your Financial Life. (Full disclosure: I received a free copy of Scott’s book.) In the present article, I want to riff off of Scott’s talk (I’ll assume you’ve watched it) and book to discuss how to talk to your children about financial investing.
I didn’t hear about the power of compounding until my first job after my master’s degree. The business manager of the small consulting engineering firm I worked for showed me on her financial calculator how, if I started investing even a little in a mutual fund now, I could save up much much more for retirement than if I waited a few decades until I could contribute a larger sum to my retirement savings. What a revelation! The reason, as Scott describes, is that the small amount invested earlier has more time to grow. That’s the power of compounding and every financial advisor in the world will share the same to their clients.
But, Scott’s reframing from “start small now and it will grow big later” to “you have a financial superpower today that will degrade as you grow older” does a better job at lighting a fire under a youth or young adult. Delayed gratification, even for great gain, is hard for everyone endure, young or old. But, the prospect of having something taken away from you is visceral and motivating. Youths and young adults can latch onto that idea more easily.
So, how do you go about telling your children about investing? Here are a few ideas:
Describe your own finances to your children. Share with them your income and expenses in addition to your investments (for retirement and otherwise). Do this both for your current financial situation as well as when you were in your 20s. This will help your children better understand the categories that go into a personal or family budget as well how amounts in those categories correspond to a lifestyle. It will also show them the effects of inflation 😐.
Go through the process of creating a budget with your children. Have them create a budget for when they have just finished their education (whether high school, college, or graduate school). Ask them how that budget changes depending upon different lifestyle decisions (e.g., sharing an apartment with a roommate, owning a car, etc.). The budgeting process follows naturally from (1) above. Once they have a budget, they can better assess the role investing has in that budget. Some articles/sites I’ve found helpful for teaching children budgeting include:
“Zero-Based Budgeting: What It Is and How to Make It Work for You”
“Cost of Car Ownership”: This calculator helps you calculate the total cost of ownership.
Zillow: By looking at how rental costs change depending on what is being rented and where you are in your geographic region, children are introduced to the idea that decisions they make regarding where they live can have a major impact on their budget.
Work through a book like Scott’s with your children. You can read a chapter a week and discuss what they learned from the chapter. Other articles I’ve found helpful to ask my children to read and discuss with me include:
“Why a 13-Year-Old Has More Investing Accounts Than You”: The article gives a nice example of how to start when you’re young and what kind of accounts and instruments might work for a teenager.
“Teaching Your Kids About Money”: This article from Focus on the Family doesn’t only address financial investing but uses a Christian perspective to create a broad framework for thinking about how we use our money.
Ask your children to do research on different financial instruments (e.g., stocks, bonds, CDs, etc.) and financial account types (e.g., retirement accounts, education savings accounts, etc.). Using that information, ask your children to create a portfolio of investments. Walk through the pluses and minuses of that proposed portfolio with them.
Help your minor children implement what they’ve learned by opening up a Fidelity Youth Account, a custodial brokerage account, and/or, if your child has earned income, a custodial Roth IRA, as appropriate. Basically, any brokerage offers custodial accounts; I think Fidelity is the only one that offers a Youth Account. In mentioning it, I’m not making an endorsement one way or the other for a Fidelity Youth Account, but I wanted to give an example of an account for kids that is different from a custodial account.
With finances, as with many other subjects, our children benefit from hearing about and seeing their parents’ experiences. It doesn’t matter if you consider yourself a financial guru, your history can help your child. If you were not able to leverage the Power of 16 when you were a youth or young adult, that’s okay. If you have few investments, that’s okay too. You can still start investing today, and sharing your experiences with your children can help them better learn about their options!
What ways have you helped your children understand investing? Please share them in the comments below!
Author: Johnny Lin. This article is for educational purposes only and does not constitute professional financial advice or a solicitation to purchase specific financial instruments or products.
Really great perspective on the concept of the Power of 16! I like how you stated things in the article...lighting a fire, how hard delayed gratification is to opt into, and having things taken away (loss aversion)! Those lines work as a very clear explanation...I might need to borrow some of that wording myself in talking about this moving forward!