Financial planning as a skill is surprisingly undervalued amongst many, which is unfortunate. It is crucial for gaining financial independence and achieving your wealth goals, and really just ensuring an overall sense of happiness in life.
Which is why it is important that parents go above and beyond to make sure their children understand some crucial financial planning lessons as early as possible and learn how to invest.
The earlier they start investing, the better will be their financial journey. Here are some of the most essential lessons parents should teach their children regarding investments.
7 Essential Investment Lessons
A crucial step in an investment journey is knowing the value of money. Let your children know its significance, and inculcate a habit of regular savings.
Teach them the concepts of delayed gratification – to cut down expenses now for greater rewards in the future. This will go a long way in helping them manage their pocket money and maintaining a balance between spending and saving.
They are likely to know how to maintain budgets and keep aside some money for savings later in life.
It is also important to teach them the difference between a want and a need. Encourage them to patiently save money for a purpose that’s larger than fleeting desires.
2.Start Teaching About Investments
Teaching young children about investment can be a tough job, so try to keep it simple to retain their interest. Discuss examples from real life that involve the idea of ‘putting in’ resources to generate returns – whether those are scenarios as simple as watering a small plant or studying for examinations.
3. Teach Them About Stocks
You can pick his/her favorite food or gadget, or really any other item, and tell them how these products are made by some awesome brands.
These companies need money for producing these products, so they sell a small part of their company to us and accumulate money. And, when they earn the profit, we get a share of it. The concept is likely to fascinate many youngsters.
4. Talk About Diversification
You can teach them about diversifying their investment by giving a simple example – such as when someone invests all their money in one business and if that business fails due to a legitimate reason, his/ her investment will go down the drain. Keeping a diversified portfolio lowers the risk.
5. Compound Interest
Albert Einstein famously called compound interest “the eighth wonder of the world. He who understands it earns it. He who doesn’t pay it.”
When children begin learning about investment, teach them the magic of compound interest. Demonstrate how reinvesting gains can further increase their returns and the longer they stay invested, higher the return they receive.
Use the formula of compound interest (A = P (1 + r/n) ^ nt), ‘P’ is the principal amount invested, ‘r’ is the rate of interest per annum, ‘n’ is the number of times in a year the interest gets compounded, and ‘t’ is the number of years. Using this formula, it’d be helpful to consider an example and show them how a principal amount can grow under compound interest.
Such as, If a person invests Rs 1,00,000 for 20 years with an interest rate of 10% compounded annually. After 20 years the amount will be Rs 7,32,807.
Teach your children to invest in a disciplined manner. They should ideally invest a fixed part of their income in a mutual fund or the stock market every month and increase that amount when their income increases. They should not skip this unless at a time of dire necessity.
Teach them how investing in a mutual fund using a Systematic Investment Plan (SIP) can instill discipline in investing. Mutual fund investments offer valuable insights into investment planning and demonstrate fairly well how to reduce risk and effort while generating favorable returns.
Teach your children to be disciplined about their budget in order to maintain a consistent investment plan. Offerings from SBI Mutual Fund include a fairly large variety of mutual fund schemes ideally placed to start their investment journey.
Finally, teach them about inflation which can reduce their purchasing power if their money doesn’t generate adequate returns from investments, or is not invested at all. Incorrect investments can reduce your buying power and even make you lose money in some scenarios.
Teach them to identify the right investment which can overcome inflation rates and grow their money.
Involve your children in your investment decisions and make them understand your thoughts behind a particular investment strategy. Ups and downs in your investment are natural and will prepare your children for future obstacles and market fluctuation – some certainties that they will all have to deal with.
During all these lessons, your children will learn to take their own decisions regarding their investment.