Teaching Very Young Children About Money And Investing

by: Investment Pancake


Kids can learn investment basics at an extremely young age.

Our experience with teaching our kid about money and investing.

A game-like spreadsheet that parents can use to help teach their kids about investing.

Very few parents are willing to discuss how and whether they teach their kids about money. It's a shame because parents can learn so much by speaking to other parents about their child-raising mistakes and successes. With that in mind, here's a short history of our experiences teaching our kid about money.

We decided to give our kid a very early start with this topic, and now that he's older, we're starting to see the results of our decision. Shortly before he was born, I put aside a small amount of stock for him in a trust. Once he was about 3 or 4 years old, I started talking to him about investing using terms that he could appreciate. Our investment lessons consisted of trips to places like McDonald's, Starbucks, and Whole Foods because I had bought him shares of stock in those companies in his trust. Even as a nursery school student, he could appreciate the idea that he owned a tiny corner of each of these stores, and whenever customers bought something, a tiny piece of the money the customer spent belonged to him. He also grasped the idea that the company would pay him SOME of the money customers spent, but use the rest of the money to open more stores, which means more customers spending more. How much did he really grasp? In his words at the time, he said: "Oh, it's like a spinning top!" I think he grasped 100% of this concept.

Even as a very young child, he quickly became familiar with the idea that saving money is smart, and that he could use the money he saved to buy another tiny corner of McDonald's. I think he was probably about 5 or 6 years old when I started to sit down at the computer with him at the end of each month to see how many dividends he had earned in his trust, and to let him help decide how we should invest that money - on the condition that he could explain why we should pick one company and not another. Most of the time, he just wanted to buy shares of McDonald's because as he saw it, "they have really good fries." Good enough reason to buy the stock, I suppose. I didn't bother talking to him about stock prices, or how to value a company, or anything like that until he was about 9 or 10 years old. The topic would only hold his interest for about two minutes at most, and his eyes would start to glaze over in less time than that if I said the word "ratio".

Like most kids, ours was curious about the family's finances. We told him everything. We even showed him what's in our brokerage accounts - how much is there, how much of it we want to give him. We didn't hold back any information whatsoever - in part because my wife and I have a very strict policy about not telling half-truths or hiding things unless it's unquestionably necessary to do so (in which case, we tell him that we aren't going to tell). When we planned vacations, our kid would sometimes ask "can we afford to do that?" Our answer was to look at a spreadsheet we keep with our income and monthly costs, and ask him "what do you think?" Once or twice he thought that our vacation idea might be too expensive, so we decided to give him an actual say on the matter, and vote on how much we should spend on vacation. I don't think that he has ever voted "no" when it comes to a vacation.

Now that our kid is getting into his teens, we can see a few traits and habits that we think are a result of his early involvement in his (and to some extent, our) financial affairs. Most of these traits and habits are also just a result of his personality for which we can't take any credit.

Our main concern with our very open approach was (and still is) that we would disincentivize our kid from pursuing a life of hard work and motivation to accel. We haven't observed that. To the contrary, he often says that he wants a job that pays well so he can contribute and one day support a family as well as he feels he's been supported. He is ambitious, and money has had no impact whatsoever on that fundamental fact about who he is as a person. When we started talking to him about money at age 3 or 4, it was purely a leap of faith on our part - we didn't know whether he would turn out to be ambitious or not. We got lucky.

Our second largest concern was that he might become obsessed with money. That hasn't happened either. He thinks about investing once a month when he reinvests dividends and then goes back to doing whatever else he was doing. His interest levels when it comes to this topic are inconsistent, and generally, he will only do investing chores if we prompt him to do so. I don't think we are raising an investment obsessed stock guru - which is fine by us. So far, I'd say that overall it turns out that our worst fears and concerns have not come to pass.

Our main reason for wanting to teach our kid about money early and often was (and still is) to help him become financially responsible, independent and to feel successful. Our sense is that he's on the right path. What we've noticed is that he is completely familiar with the concepts of diversification, compounding, saving, and reinvesting. He understands what shareholder equity means, what earnings are, what a profit margin is, and knows how to measure earnings growth and book value growth. He understands what a P/E ratio is and has an implicit understanding that he should only buy stocks if the stock price is commensurate (or hopefully less than) the value of the company. If he isn't willing to look into that, then he knows that the smart thing to do is to just reinvest savings into an index fund and forget about it.

The most important thing our kid developed (in my view, at least) is a very clear idea that if you own stock, what you own is a piece of a business. He thinks a great deal about what makes a business a good thing to own... or not. For example, he is very attracted to owning water utilities because the demand for water is guaranteed and because water utilities typically enjoy a monopoly over the areas they serve. He is far more focused on the underlying business than he is on the stock price. What is most impressive to me is his reaction when he sees that stock prices for one of his investments are falling. He invariably will opt to purchase more shares. He literally has no fear when it comes to shifting amounts of principal in his account because he has grown up watching prices rise, fall, rise again. I still have to work hard to remind myself not to be afraid when the market tanks - whereas our kid innately has no such fear whatsoever. To him, rising and falling prices are inevitable (and boring) noise, and if anything else, falling prices simply present an opportunity to buy companies when they are on sale.

In short, we have been extremely happy with the growth of our kid's attitude and habits when it comes to investing and saving. The main thing for us is that involving him in financial matters makes him feel grown up and like he is an integral part of our family team. Although his confidence in other areas can be shaky and uncertain at times, our kid's financial self-confidence is quite strong. In retrospect, we feel that it was a good choice for our family to teach our kid about money, and involve him in the family's finances (as well as his own personal finances) from a very, very early age. We don't know any other families that have the same approach as ours - I suppose it isn't the sort of thing people generally feel comfortable talking about. As I said in the beginning, that's one of the main reasons why I decided to write this article.

If I could have done anything different, it would have been to use more visual aids during teaching sessions when he was much younger. I think it would have been more fun if I could have demonstrated that investing is like a very slow moving version of a video game like Farmerama or Sim City. The object is to plant stocks, harvest the dividends, and use the dividends to plant more stocks and build your farm. I went ahead to create a game-like spreadsheet with a pie chart, where the object is to grow the green "farm" area (which measures the dividend income from the portfolio) until you hit a goal that you get to input.

The spreadsheet updates automatically for new dividend information, but the player's parent has to manually input the amount of cash sitting in the player's account. For any parent who is interested, feel free to copy the spreadsheet game if you think it might be a useful teaching aid. Here is the link. Click it, and when the link takes you to Google Sheets, hit "file" and "make a copy." You will need a Google account in order to make and store a copy of the spreadsheet game.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not investment advice, and I am not an investment advisor.