Whether your teenager is already working at their first job or they're not quite ready to enter the job market, now is the perfect time to teach her about investment planning. Getting an early start in financial literacy can help her to grow up to be a financially savvy adult.
And if your child is like most American teens, they're somewhere in the middle of the pack when it comes to financial literacy. Research indicates that about 18 percent of American students can't perform basic personal financial tasks — such as explaining the need for an invoice or defining the difference between wants and needs — below average for industrialized countries. Fewer than 10 percent of American students could perform financial literacy tasks such as determining a balance on a statement or explaining income tax brackets.
Significantly, students that had their own bank accounts showed higher rates of financial literacy, underscoring the need to involve teens in the financial planning process. Here are three reasons why you should share investment planning basics with your teenaged child.
1. Low Interest Rates Impact Investment Planning
While it can be tempting to simply set up a savings account down at the local bank and train your teenager to deposit a certain percentage of their income from that part-time job or Grandma's birthday check, that's not actually going to teach them the power of investing. Why? Because interest rates are low, just a fraction of a percent.
Putting money into a savings account at these low interest rates isn't really putting that money to work. She won't see much return. In fact, just letting that money sit there accruing minimal interest actually devalues that income's real spending power.
Instead, if she was was to invest that money in the market, they'd be able to see the power of compounding interest at work. Help them understand the concept by
teaching them to use a compounding interest calculator — and bringing the power of investing to life. Passive investment strategies at the level of risk tolerance your teen is ready to handle may allow them to see a higher return as they learn about investment planning first-hand.
2. Financial Planning Strategies: Getting Ready for the Future
Once your teenager graduates and lands that first post-school job, they'll be faced with a range of retirement planning options: 401k? IRA? Roth? If she is already familiar with how the market works, making those tough — and important — decisions will be much easier.
A comprehensive financial foundation will provide the knowledge they need. Decision-making based on knowledge and experience will help guide your teen through the many financial choices facing them as adults.
3. Making Savvy Investment Decisions: Wealth Strategies to Try
Speaking of making financial choices, it's also essential to teach her about the costs and fees associated with different types of investments. While some investment professionals may hope their clients simply don't pay attention to the small print, your teenager needs to understand the importance of working with a fee only financial advisor, as well as the higher costs of active investment strategies.
Instead, teach her to seek out low-cost investment platforms that don't charge exorbitant fees that unnecessarily reduce returns. This is the perfect opportunity to educate your teen about the importance of a diversified portfolio, as well, in order to manage risk.
Together with the help of a trusted wealth advisor, you can work with your teen to increase their financial literacy and help them grow into a financially savvy adult.