The Common Sense Investor

(and really make them listen!)

So you want to teach your kids about the importance of investment. Well, you won’t get by anywhere by talking about it, or buying them stocks instead of a much begged-for iPod for their birthday. The fact is, very few of them are actually thinking about money, much less the strategies to make it grow—for them, the only “interest‿ they want to accrue is that of the boy (or girl) in their history class.

So if you even want to make them listen to why investment matters, you’ve got to bring it down to terms that they not only understand, but care about. Let’s take that iPod. You know they want it. They know you’re not going to buy it for them—and by the time they save enough from their allowance to actually get it, it’s lost its coolness factor. What they can do (and here is where your investment lecture is going to take off) is make the little money they do have grow.

Not by putting it in a bank (that’s a lesson in savings). Or borrowing money from you (that’s a lesson in credit management). But by starting a business. Something small which involves putting up a capital and weighing the different options on the basis of risk and rate of returns (i.e., selling cookies vs. selling handmade bracelets).

Why this investment lesson works:

This entire exercise shows kids how investment works, concretely and effectively. You’ll still explain everything—notebook spread out on the table, calculator at hand and rows of numbers summarizing how much they earn for every financial scenario (do you make 100 cookies or 300?). But you have their attention because it’s their money they’re spending and their iPod at stake.

Do’s and Don’ts:

• Don’t give them the capital, it has to come from their own pockets. They won’t feel the risk if Mom and Dad did all the funding.
• Do guide them by presenting the pros and cons of every business idea, but let them have the final say (even if you know it’s headed for disaster).
• Don’t rescue them from problems. If they baked too many cookies without thinking about how to sell them, you can’t offer to refund their costs. (That teaches them to think about all aspects of an investment, and how to deal with risk).You are, however, allowed to secretly send a couple of friends to buy a few bags, just to help them break even. (Chalk it up to “marketing and promotions”.)
• Do let them do whatever they want with their earnings, although you can point out that if they reinvest the money in their business, they’re chances of earning are that much higher.