Knowledge Bank

3 easy ways to teach your kids about money and the stock market

Talking about the stock market, and involving your children in the investing process, is a great way to help them build a mindset of an investor at a young age.

Twenty/20

Katerina Simonetti started learning about money basics later in life, after graduating college. Even then, she says, "I had to teach myself all of it."

Simonetti went on to pursue a career in financial services, and as a result of her own experiences, she's also become "really passionate" about teaching kids about money. She started introducing the idea of stocks to her two sons when they each were around the age of 5 and a few years ago, Simonetti started a young investors club for the children of her clients. 

"The biggest challenge in talking to children about money is not the children, it's us, the parents," says Simonetti, a senior portfolio manager at UBS Private Wealth Management. To start, focus on concepts that are "very, very simple," mix in a lot of real-world examples, find children's books that focus on similar topics, and listen to what questions your kids ask, she recommends.

"What I would like to achieve is that kids have a comfort with these topics that's as nonthreatening as riding a bike," Simonetti says.

By modeling sound money habits yourself, you can teach your kids valuable lessons without even realizing it, adds Skip Johnson, a financial advisor and partner at Great Waters Financial. "I'm a big believer that 'more is caught than taught,'" he says. "Money conversations within families should not be a taboo topic."

Here are three ways Simonetti and Johnson recommend broaching conversations about the stock market.

1. Start with companies your children already know

Johnson first became intrigued with investing in the seventh grade, when he bought a stock with the help of his grandfather. "Looking back now, that was pretty unique," he says. "My peers didn't know what the stock market was until much later."

Now a father of three daughters, Johnson has started those lessons at an even younger age with his children. For example, he says the family often visits a bank in the Twin Cities area and he'll explain to his kids that they're "a very, very small owner" in that bank, and that they can become investors by buying shares of companies.

"We look for occasions and teachable moments," Johnson says. "It might seem weird to bring it up, but it's amazing what they catch on to."

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That's the same entry point that Simonetti uses with her children and the 20 to 25 members of her young investors club. "I definitely start talking with children about individual stocks because it's easier to grab the concept of owning a part of a company."

To find inspiration, look at the toys or products your kids regularly use, many of which are from publicly traded companies. Those could include: toy makers like Mattel or Hasbro, theme parks like Disney or Six Flags, food or beverage companies like McDonald's or Coca-Cola, and the makers of popular video game consoles like Xbox (Microsoft), Nintendo, and PlayStation (Sony).

Starting with her sons at the age of 5, Simonetti approached the topic by asking: "Wouldn't it be great if you owned a small part of your favorite company?" As her kids have gotten older, the conversations have evolved, and now she uses other opportunities to emphasize the importance of investing.

Keeping dialogue open is key, Simonetti and Johnson say. You may be surprised by how quickly your kids start to tackle concepts related to investing that you didn't know at the same age.

Wouldn't it be great if you owned a small part of your favorite company?
Katernia Simonetti
senior portfolio manager at UBS Private Wealth Management.

2. Involve your kids in the investing process

One of the biggest benefits to parents today is that investing is more accessible than ever, Johnson says. That's thanks to low-cost options like index funds, the option to buy fractional shares, and the elimination of many trading fees or investment minimums. 

"You can take really any amount of money that you can afford to invest and buy fractional shares of whatever company you like," Johnson says. "It's really revolutionary."

The kids in Simonetti's young investors club start out with $500 from their parents, but Simonetti says it's easy to start investing with a smaller amount. The amount matters less than the process of selecting stocks for the portfolio, she adds. "Even at a very young age, make the child a part of that decision-making process."

Much of building wealth is the mindset.
Skip Johnson
financial advisor and partner at Great Waters Financial

What's more, it's not about the portfolio's results so much as becoming familiar with investing concepts and learning from mistakes along the way, Simonetti says. 

Even if you begin investing with your child with a very small amount of money, and buying fractional shares of a handful of stocks, doing so is an important step in democratizing investing, Johnson says. "You can start now, you can start small," he says. "Get them into the mindset of being a share owner and being an investor. Much of building wealth is the mindset."

3. Build upon these ideas

Once your kids have a grasp of what it means to be an investor in a single company, you can begin introducing them to more complex topics. For example, the members of Simonetti's young investors club begin by selecting a handful of individual stocks and then work up to exchange-traded funds (ETFs).

She tasks the club members with following the news, which can be a good way to introduce kids to the concept of funds. For example, if they are passionate about a particular topic in an industry, like health care, but not so excited about particular companies within that, she'll explain why investing in an ETF is "a way to buy a whole section of the market."

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Similarly, Johnson says you can work up to incorporating low-cost funds by looking at the top holdings of any ETF to screen for companies familiar to your children. Then he makes a connection between being an owner of a company to owning a piece of a fund that invests in those companies instead.

"An index fund isn't a weird, esoteric thing," Johnson says. "Sometimes the stock market feels scary, but remember that what you're buying are a little bit of some of the greatest companies on the planet."

Finally, encouraging your children to start following the news can make for some important investing lessons. When Simonetti's youngest son was 9, he approached her after hearing that the Dow Jones Industrial Average had fallen almost 1,000 points one day.

"It was a good opportunity for me to ask: What do you think it means?" she recalls. And after they discussed what was going on and the idea that market drops can be a buying opportunity for long-term investors, Simonetti's son asked if he could invest more in the stock market.

It made her feel great that "we're raising this amazing generation that will be much more confident about money and investing than our generations were."

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