Just about every financial advisor tells people to invest. This is great advice for adults to follow, but it’s even better for kids. If they invest properly, they can save thousands—or potentially millions—toward their financial future.
Investing early grabs the power of compound interest.
By far, the biggest reason kids should invest is compound interest, which is money that accrues not only on the principal amount of a loan, deposit or debt, but also on the interest that has accumulated on that principal. Over time, compounding means that returns grow very quickly, because you earn money on the funds you’ve already gained. Now, this concept can benefit any investor, but it is particularly useful to children and young adults, because they have more time to allow the interest to continue to compound, yielding significantly larger savings in the long term. In fact, the amount of earnings from the interest can be so big that Albert Einstein, widely considered to be one of the most brilliant scientists and mathematicians who ever lived, once called it the eighth wonder of the world. You can read more about how it works and see some good examples here: How Money Grows
Putting some money into investments shows that money can work for you.
One of the most prevalent ideas about money is that you have to work for it. Although this is true to some degree, it’s also true that investing wisely can essentially turn a small dollar amount into a bigger one, all without you doing very much. This isn’t to say that you shouldn’t teach your children to work hard, but rather to say that you should show them how to be as financially prudent and efficient as possible. By doing this, your kids will have more time to enjoy life and be themselves.
Choosing wise investments teaches kids about delayed gratification.
The whole area of investing in finance is based on the idea that if you give little now, you’ll get it back and then some later on. Put another way, it’s centered on the concept of looking forward to a financial or financially-related goal. This is an extremely important lesson for kids to learn, because in their early years, they simply do not have the cognitive or social development to always make decisions based purely on logic—they react to an enormous degree based on how they feel in the moment, so putting buy-it-now impulses aside in favor of save-for-later strategies is huge.
Investing provides an opportunity for children to view the world from a broader perspective.
The number of companies or causes in which children can invest is seemingly limitless. When you encourage your child to invest, you encourage him to think a little more critically about what he likes, as well as how what businesses are doing affect him and others. He can make a conscious choice about what to support. Developing the skills of research, analysis and decision making related to this process is useful well beyond finance, and it can teach him to be respectful of the diversity present in the world.
Investing allows kids to get bigger profits.
A big bummer about being younger is that, as a minor, the number and type of jobs you can get is limited. Even if you land a job, it likely won’t pay much, and even if it does, commitments such as school limit how much you can work and earn. This makes it extremely difficult to save for goals. We’re not talking a new cell phone or designer jeans here, either. We’re talking a car, college or a down payment on a first house. Even if your child chooses an investment that does not involve compound interest, they still potentially can earn money from what they invest. This can put them in a much better financial position despite having the cards initially stacked against them.