If your child goes to school in Canada, they’ve likely learned some money basics. That’s because school boards across the country have recognized the importance of teaching kids financial literacy and made it part of the curriculum.
In Ontario, for example, financial literacy concepts have been incorporated into math classes starting in Grade 1, where kids learn about bills and coins and their values. As they progress to higher grades, they learn about the different ways to pay for things, how to distinguish between a want and need, and how to determine whether something is good value by comparing prices.
In middle school, teachers outline different types of financial goals and ways to achieve them. Kids learn about how interest rates impact their bottom line, including the cost of borrowing on a credit card and mortgage. Teachers go over budgeting and saving, and kids are asked to put together a sample budget to show that they understand the concept of living within one’s means.
All this is a step in the right financial direction but if there is room for only one more mandatory topic, it should be investing. Investing is a crucial component of financial planning – and it’s widely misunderstood.
Today’s young adults are very interested in investing – and they should be. Saving without investing makes big financial goals such as retirement difficult to achieve. That’s because investing is what allows savings to keep up with inflation. Everyone with savings should be investing in some form.
The emergence of social media and fin-fluencers combined with the popularity of online brokers, which skyrocketed during the pandemic, has made it easier for young people to invest – and that can have a good outcome if done right, but a bad outcome without the right knowledge.
There is no shortage of information about investing available online. The trick is figuring out what’s good advice and what’s terrible advice. This can be hard to discern and unfortunately, the bad advice can be more enticing as it comes with the lure of making money quickly.
People who jump into investing without understanding what they are doing might try to time the market by trading in and out of stocks frequently, get caught up in the hype of a new hot investment, and make large bets on individual stocks. This often ends badly.
With some financial education, young people will have a base level of knowledge that can help them actively seek out advice from trustworthy sources and tune out the rest.
Investing at its core is simple. Start by introducing the idea of growing a pool of money by adding to it regularly, which sets the stage for understanding the concept and benefits of saving and investing. As kids progress, they can learn to calculate interest in a guaranteed investment certificate and how compound interest works.
Showing kids how adding a small amount of money can grow over time is very motivating and can encourage them to start saving – and investing – early in their working lives.
Older kids can learn about the stock market and the concept of owning stocks in companies. Mutual funds and exchange-traded funds should be explained, including how they work and how to invest in them. Other important topics include how the financial industry is structured, what fees are charged, and how to spot frauds and scams.
Most importantly, teenagers need to understand the concepts of risk and volatility, and in particular, the relationship between risk and return. This can help prevent future pain by teaching them the all-important lesson: Be wary of investments that promise outsized returns or get-rich-quick headlines.
Slow and steady might not sound exciting, but watching your portfolio grow certainly is. And today’s kids are smart enough to understand that.
Anita Bruinsma is a Toronto-based financial coach and a parent of two teenage boys. You can find her at Clarity Personal Finance.