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  • Writer's pictureRyan M. Vogel, CFP®

What I’m Teaching My Kids About Money, Part 3

Key Takeaways

  • Use college savings as a real-life example when educating your kids about investing.

  • Risk and return are directly related.

  • Start saving early to benefit from compound growth; you can always adjust later as needed.

  • Help your kids understand the difference between stocks and bonds.

My sons are 9 and 11. While they are still learning the basics about money and how much things cost, my wife and I feel it’s important for them to have a solid understanding of what I call “Investment Essentials.” Investing can be extremely complex, so I’m breaking it down for them into the most fundamental terms. Saving for college is a top priority in our family and deciding where to go to college will be one of our boys’ biggest financial decisions. I use their education savings accounts to help illustrate how investing works. But first, I cover the investment essentials below:

Investment Essentials

  1. Start early so you can benefit from compound growth.

  2. Provide a basic example of how exponents work in math.

  3. Explain how stocks are shares of ownership in a company; bonds are loans.

  4. To explain this concept on kids’ terms, pick their favorite toy and use the company that makes it (Apple, Microsoft, Nintendo, etc.) as an example of a stock and a bond issued by that company.

  5. Explain how the value of stock changes dramatically from month to month, but over time it will grow at a higher rate than bonds. Then explain how bonds are “safer.” They don’t fluctuate in value much from month to month and pay a consistent amount of interest. That’s enough detail for kids and teens.

  6. Set a goal that you are saving for and determine when you need the money for that goal.

  7. Risk and return are directly related. If the goal is far into the future, invest more in stock for the higher returns since you won’t need the money soon. However, if the goal is within the next couple years, invest more in bonds for safety to ensure that you have the money when you need it.

After I cover the three essential topics above with my kids, I use their 529 savings accounts to illustrate the investment strategy. My wife and I opened these accounts shortly after each of our children were born. We have about 10 years’ worth of data to show them illustrating how their accounts performed during different periods of their lives.

My boys understand that even though account balances are down for almost everyone this year, they have plenty of time before they need the money. They can see the big picture in their accounts, which have been growing nicely over the past decade, so they can see they’re still on track for reaching their goal.

Risk and Return

The biggest concept I’m trying to teach my kids is that risk and return are directly related. Just the other day I was talking to my 11-year-old about the difference between a stock and a bond and why he should expect a higher return from a stock than a bond. Now that short term interest rates have climbed dramatically this year, conservative investments are a bit more interesting than they were a year or two ago. For instance, you can now get a one-year CD for 4.5%, which is substantially higher than what we’ve seen in recent years. However, my kids aren’t going to college a year from now. They won’t need the money for another six to ten years, so we can afford to take more risk with their college savings accounts instead of just investing 100% of their accounts in bonds or CDs. That is the most important investment lesson I want them to understand – that risk and return are directly related. When we invest, we define risk not as a total loss of money, but as a temporary change in value from month to month. As mentioned earlier, our boys can see the 10-year trend of their account values over time. Again, there have been several declines during the past decade, but over the entire period, the growth of their investments has been substantial.

At their current ages, my kids’ allocation is about 80% stocks to 20% bonds and now they’re starting to understand why they have that mix of investments. They are also starting to understand how that mix will gradually become less oriented to stocks and more to bonds as they get older -- and thus, closer to their target goal date (freshman year in 2029 and 2031, respectively).

My boys are starting to understand why they don’t want to be mostly in stocks as they get close to college age because they could have another big drawdown as we had in 2022 -- right before starting their freshman year – which wouldn’t give their accounts enough time to recover. After a year like this, in which their account balances are down over 12%, they can see that investments don’t automatically go up all the time. But at their ages, they can see they have plenty of time to recover

Conclusion I want my kids to understand that the best way to save is to start by understanding the purpose of the savings. Start with the goal first. How you invest your money determines how you save toward that goal. So many people think that investing is all about picking winners and that it’s no different than gambling. Robin Hood and low-cost investing apps exacerbate that view. Instead, investing is about setting a financial goal, looking at how much time you have to save for that goal, and how much you’re allocating into stocks vs. bonds to get you to that goal. The sooner you can ingrain this mindset into the children and young adults in your life, the better.

If you or someone close to you has questions about how to talk to your kids about money, please don’t hesitate to reach out. We are happy to help.




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