I always teach my kids to save their money in the bank and though this is a good practice, I feel that I should not be focusing on just saving but also in investing. How do I teach them about it without really boring them with the technical mumbo jumbo?
Congratulations! You are an enlightened mother and your wisdom will bring precious results in the future. You did not mention how old your kids are.
To begin with, it is important for your children to understand the two basic types of investments, namely, lending investment and ownership investment.
Putting money in the bank is lending investment. Money in a savings account or in a time deposit is actually a loan to the bank. In exchange for using the depositor’s money, the bank pays him “interest”. This is the fixed income that the depositor gets while his money is kept in the bank. Here, the bank guarantees the payment of interest (depositor’s income) and the principal amount in the deposit. Because of this guaranty, the interest rate is relatively low as the risk of losses to the depositor is also relatively low.
Ownership investment, on the other hand, is actually the acquisition of assets (shares of stock, property, etc) with the expectation to periodically earn income generated by the asset and, eventually to accumulate gains due to the increase in the value the asset over time. In ownership investment gains or losses are actualized only when the asset is sold.
Generally, ownership investments are more suitable to meet long term goals.
At the risk of oversimplifying, investors must be guided by the following economic laws:
a) the higher the return the higher the risk;
b) the longer the time (investment period), the lower the risk; and
c) the longer the time, the higher the return
You can start explaining the foregoing principles to them so they start with the proper understanding of investments. When one invests, he must have clear financial expectations based on specific economic goals. These concepts can be taught through games so that learning takes place with a lot so fun as well.
Explain that, no matter how small, a little interest is much better than just keeping their money permanently in a piggy bank at home not earning anything. Piggy banks help in saving because loose change can easily be dropped in until the bank fills up. Empty the piggy bank regularly and deposit the contents into the bank account. Explain to them the entries in the savings bank book. If you yourself don’t understand, make sure you ask the bank employees. They will be most happy to help you especially with your kids because those are their clients in the future if they treat them well.
If they have accumulated money over P6,000 in their savings account, then, you can start showing them other investment options. The next option available for a minimum of P5,000 is the Mutual Fund (MF). There are a few funds that accept this small minimum as an initial investment. The minimum for Unit Investment Trust Funds (UITF) of banks is P10,000. Thereafter, they can add P1,000 each time into their account.