December is almost over, which means a new year, a new energy, a new opportunity, a new mindset.
2022 Is not only the Year of Tiger, a magnificent, fearless and determined force of nature, but it’s also the year we ditch the consumer mindset and invite in the investor mindset and the investing habit.
An investor mindset is intentional, operates from a place of abundance, facts and knowledge. There’s an expectation of a financial return on money spent on assets, and saving is prioritised over spending.
An investing habit is what we do on autopilot each time we receive income. The Millionaire Mindset Money System teaches children from a young age to ‘grow’ half of each and every dollar that flows into their lives. Depending on the age of the child, it goes into their ‘grow’ jar or ‘saving-to-invest- bank account or straight into an investment you have already started for them.
If this seems impossible to you, take a moment to consider that children are a blank slate when it comes to their financial habits. If this is what they are taught from day dot, there is an excellent chance they will do this for the rest of their lives.
A consumer mindset thrives on instant gratification and drives us to buy stuff we don’t need or often didn’t even know we wanted until it was marketed to us. The result is owning lots of stuff, living beyond one’s means and going into debt. Usually there isn’t an expectation of a financial return on money spent.
I know it can be challenging to teach children an investor mindset and investing habit, especially with social media and ads constantly bombarding them, encouraging consumption and ownership of financial liabilities, rather than financial assets. But with practice, thinking and acting like an investor can become as natural as brushing teeth, watching Tik Tok and tying shoelaces.
Here are five tips to help nurture and develop that investing mindset:
Instill a Habit of Investing
Introduce children to ‘Pay Yourself First’, a saving-to-invest strategy focussing on saving and investing before spending.
Teach them to put aside half of every dollar they receive, whether it be from allowance, work, or gifts. Explain that this is the money that will work for them and when invested, will make them more money.
Depending on the age of the child, this money can be kept in a clear ‘grow’ jar, a ‘save to invest’ bank account or invested directly into their share portfolio.
Pique Their Interest by Showing Them Compound Interest in Action
The easiest way for children to grasp the power of compound interest is for them to experience their money multiply, without them doing anything. If they don’t see it, chances are they won’t believe it’s possible for them.
For the younger child, the compound interest fairy can visit while they sleep and add ‘interest’ to the money in their ‘grow’ jar. When they wake, they will see their money has multiplied and their jar has more money in it. Explain the compound interest fairy only visits if they leave the money in their ‘grow’ jar.
Learn how to become a compound interest fairy for your child.
For the older child use stories and online investing/compound interest calculators to help them understand the relationship between time and compound interest.
For example, 15-year-old Lily and her 45-year-old mom start investing in the stock market at the same time. Because they are beginner investors, Lily’s mom suggests they invest in an Index Fund with an average annual return on investment of 8%. They use an online investment calculator and work out that if Lily invests $100 dollars every month, by the time she is 65, she will have close to $700,000 and if her mom invests $1000 every month, she will have about $550,000.
Lily is confused because her mom would have invested $180,000 more than she did but would end up with less than her. Lily’s mom explains that although she invested more money than Lily, compound interest needs time to work its magic and Lily’s money was invested for 30 years longer than hers. Lily started investing when she was 15 so compound interest had 50 years to work its magic on her money, whereas her mom only started when she was 45, so there was less time available for her money to grow and work for her.
When children understand that compound interest needs time to work its magic on their money and that it’s possible for everyone to become a millionaire, delayed gratification and saving makes more sense to them and is easier to do.
Have fun with the calculators using different rates of return, time frames, amounts invested and compounding frequencies.
NerdWallet, Money Chimp, Investor.gov and Sorted have reliable easy to use compound interest calculators.
Shift Thinking from Buyer to Owner
Help children explore the idea of investing in what they consume and explain the difference between investing (owning) and consuming (buying).
If they love eating Big Macs and Chicken McNuggets, suggest that maybe they could rather spend their money on buying a small piece of the company that makes the burgers and nuggets. Explain that each time they buy a burger or nuggets, they are making the owners of McDonalds a little bit richer. If they own a piece of McDonalds, they will become richer every time somebody else buys a burger or nuggets.
Available data suggests that McDonalds sells about 300,000 burgers every hour. To give them an idea of how much McDonalds makes, find out the cost of a burger and multiply it by 300,000. Ask if they think McDonalds would be a valuable company to own and if they think it will do well in the future. Ask them why they think that.
Explain that when they own a tiny piece, or a share, of McDonalds, they will be called a McDonalds shareholder.
As McDonalds becomes more valuable so should the value of their share which means they can make more money. This is how we get the money we already have to start working for us and making more and it’s called investing.
Look up the value of a McDonalds share on Yahoo Finance. At the time of writing this article, one share cost 252.46 USD, which is costly and demotivating, especially for a child. Saving that amount of money could seem impossible to them.
Explain they can own even a smaller piece of McDonalds (or any other listed or public company) by purchasing a fraction of a share. Explain one share as a whole pizza and a fraction of a share as one piece of the pizza.
Play “The Rule of 72”
The Rule of 72 is a simple way for investors to estimate how many years it will take for their investment to double in value, based on its expected annual rate of return. For example, $50 earning 1% in a savings account could take 72 years to double to $100. That same $50 invested in an ETF or an Index Fund with an expected rate of return of 10%, could take 7.2 years to become $100. If the expected rate of return is 8%, it will take 9 years for the money to double.
Look up Ticker Symbols of Favourite Companies and introduce Volatility
Go to Yahoo Finance and use ticker symbols to search the share price of companies they know and use, like Apple (AAPL), Roblox (RBLX), Netflix (NFLX), or Disney (DIS). Let the child experience short term volatility (share price bouncing up and down) in the stock market by checking the 1D to YTD performance. To show them the general long term upward trend of the stock market, click on 1Y to Max.
Along with these five activities, you may want to let your child experience real-time investing but without risking real money. Share trading games are a fun and often free way to practice how to be an investor. Investopedia and NZX Virtual Trading tools are both free to use. Important to note, however, is that simulated experiences can be vastly different to trading in the real world where complacency, overconfidence or decisions based on emotion could have disastrous consequences. Albert Einstein supposedly said “Compound interest is the 8th wonder of the world. He who understands it, earns it, he who doesn’t, pays it” Who am I to argue with him?
And remember…a financially confident empowered capable and independent adult is raised not born.