How Early Investing Education Contributes to the Development of a Financial Mindset in Kids

If you are a parent, you may have wondered about the transition of your kids into adulthood. New responsibilities and requirements of real-life skills can be a lot to handle for young people and it is natural for parents to want to provide the necessary support for their children to help them enter the “adult world”.

An essential component of this transition is monetary in nature. As young adults enter the labor market and get their first paychecks, the issue of personal finance management and financial literacy in general, come to the surface and become paramount.

What can you do to help your kids acquire the necessary skills and experience to be more prepared to deal with new financial responsibilities and can early investments be effective? – Let’s find out.

The importance of financial literacy in kids

Early development of financial literacy in kids can go a long way in determining their financial stability in the future. A child that has some understanding of financial assets and markets is more aware and ready to enter the adult world and wastes no time during their young adult/student years.

A financially literate young adult makes more sensible financial decisions, potentially makes investments and has multiple income streams, which reduces risk and leads to a more stable, stress-free life.

Financial literacy is a great way to bolster responsible spending habits and critical thinking in kids. As they learn to rely on their own judgment and see how they can improve their financial standing and what that means for other aspects of their lives, kids can become more self-sufficient and independent, which are essential characteristics of functioning, responsible adults.

How to get kids to try their hand at investing early?

One great way to incentivize and boost financial literacy in kids is to give them access to a demo trading account where they can use simulated funds to buy and sell stocks, bonds, crypto, etc. This process should be integrated into an education program which explains the basics and core mechanics of how each individual asset and market works.

For example, parents can use an investing education center that compiles educational content for them, so they can go at their own pace and accumulate basic financial knowledge over time, which can also improve their chances of success as they keep trading.

Simulated trading accounts come with all the basic features that are included in a live account, which gives kids an understanding of how to eventually switch to a live account once they come of age and can be responsible for managing their personal finances.

Should kids use funded investment accounts?

Underage kids cannot be the sole custodians of live trading accounts funded with real cash. However, parents may be wondering if allowing their kids to use accounts held under their name to raise the stakes and give them the opportunity to manage real funds.

One way to do this is by using a custodial IRA, which allows kids to buy and sell securities freely, while their parents or guardians are the custodians of the account.

While this may seem like a harmless idea, it could increase the psychological pressure on kids so they do not lose their parents’ funds. Therefore, a simulated account is more advisable for them to play around with and learn through trial and error.

What should kids invest in?

While simulated trading accounts can be great for understanding the core mechanics of the market, they also lend themselves to reckless trading with no consequences.

Therefore, it is important to give some direction to youngsters about the importance of diversification and responsible investing. This may be a bit less exciting, as bond investing is inherently less exciting than stock and crypto trading. However, understanding the importance of risk management is crucial in developing responsibility and financial literacy in kids.

The best starting point for kids to learn about is how stocks and bonds work and how the two asset classes can balance each other to arrive at a reasonable risk profile.

Youngsters tend to be more risk-tolerant and prone to making irrational decisions. While risk-taking is essential in investing, developing sensible risk management skills is equally as important.

Psychological factors kids should know about when learning to invest

It is highly likely that kids who try their hand at investing will be anxious and overwhelmed at first. Teaching them about the core psychological factors affecting their decision making can help them be more mindful and ultimately level-headed when it comes to financial decisions.

Some important factors they should learn about include:

• Routine – investing can be a repetitive process over the long term, which places a particularly great emphasis on setting up a routine and maintaining discipline in the process
• Managing stress – not all trades are going to go in their favor, which is why it is important to teach kids how to handle stress so that unsuccessful trades do not affect their mental state too severely
• Overconfidence – when things are going well, overconfidence can take hold, which can lead to reckless financial decisions. Teaching kids about the importance of keeping a level head is crucial in developing restraint and calculated risk-taking

Kids who learn to invest while remaining mindful of the potential pitfalls can develop into highly stable and financially aware adults, which lends itself to a more fulfilling adult life in the future.