Everything you Should Know About Investment and it’s Benefits
One of the major mistakes that schools all over the world make is that they do not prepare the students for financial responsibilities. For many children, a school for a period of almost 14-15 years of life is like an alternate reality without any responsibility other than studying but as you get older, the concept of money becomes more tangible. But where schools fail to prepare our kids, the parents must take up the responsibility to prepare them for the future.
Start with Personal Financial Management
If you have read our blogs then you will know that investment is one of the pillars of personal financial management but it is the last pillar. Before you introduce investment to your children you need to introduce personal financial management.
The children must first learn, understand and practice the basics of budgeting, spending and savings. Once they have understood and internalized these concepts, then they will be ready to learn about investment and how it can be used to generate wealth.
Break the ice
Before you teach your kids about the technical aspects of investment such as compounding. You need to teach them what it really is. This requires giving the children a conceptual understanding of the concept of investment.
Unfortunately a lot of people today lack this basic understanding. This concept requires a step by step approach.
It is better to teach the kids first about earning money. They will obviously understand that in order to earn money you need to work. You should at this point also encourage teenagers to seek out summer jobs or try their luck at earning money online. To find out ways in which teenagers can earn money, click here.
Once the kids understand that you need to work to earn money. You should now introduce them to another way of earning money and that is through investment. You can introduce investment as a way of earning money where you do not have to do anything. This should be enough to get their attention.
Play the Bank…
You can start off by playing as their bank and have them deposit their saved pocket money with you for a week or a month and then you can promise to return them more than they deposited. This will make them understand how simple interest rate works. It will also encourage them to save more pocket money.
Once they understand this concept, you should also encourage them to play the stock market by acting as a portfolio manager. With the help of e-learning tools, you can teach your children how to manage their own investments. You can even help them with their investments or invest for them.
At this point, you can explain to your children about compound interest. You should start with explaining this concept to your kids at a young age because if they understand it at a young age then they will be ready to understand it when they grow up.
The best way to teach your kids is to do it through examples. By giving them examples you can explain in detail the concept of compounding. You can also start small and slowly grow the concept.
Introduction to Life Insurance
The next step after the kids understand the concept of investment is to talk about life insurance.
You should tell them that investment is a long-term process and it takes a long time before you see the return on your investment. On the other hand, the life insurance that you are buying provides you with a quick return on your investment. Life insurance is a contract between you and the insurance company. You take out the policy to cover your financial responsibilities and ensure that you don’t run out of money.
In the contract, there are two parts. The first is the premium. The premium is the amount you pay every month for your insurance policy. After paying the premium, the insurance company will pay the insurance benefit to you at your death or when you meet some other financial responsibilities.
Explaining this concept to children in a simple manner can give them a glimpse of the truth.
The second part of the contract is the coverage.
When you are buying life insurance you are buying coverage. You are buying insurance against death. When you buy coverage you can determine how much you want the insurance company to pay in case of your death. You can also determine how much coverage you want to have and you can buy it at any age.
At this stage, you need to explain to them the different types of life insurance. For example, term insurance provides you with coverage for a particular period of time. You will pay a premium to be insured for this period of time. Term insurance can be useful in the following situations.
It can be useful if you want to ensure that you have the money required to buy a home or car. It can also be useful if you are planning for a family. It can also be useful if you are planning for any other financial goals.
After explaining the different types of life insurance you can explain to them the different benefits that they can get.
They can benefit from having life insurance in the following ways.
- Term insurance allows you to be compensated for death. Term insurance provides you with coverage for a particular period of time. This is useful because it is not expensive.
- Cash value insurance allows you to set aside money in a particular insurance policy in the form of cash value.
At this point, you can encourage them to start investing in mutual funds to learn about diversification and see how it works. Mutual fund investing can be introduced at this stage as well.
Finding out the best mutual fund will be a challenge. It is advisable that the parents spend some time researching different mutual funds and pick the ones that are the best suited for the children’s goals.
Another important component that they should learn is the benefits of tax-saving and tax-free investment.
It is important that you explain to them that you can take advantage of the tax-saving that the tax-free investment will provide. When you are investing in a tax-free investment, you will be paying taxes on the profits that you make from the tax-free investment. The tax-free investment, when combined with the tax benefits that the kids will gain from investing in mutual funds and life insurance.
The kids should learn that there is a direct relationship between financial responsibilities and personal finance. Without financial responsibility, they cannot have personal finance. It is important that they learn about the importance of money.
Once they understand the concept of money, they should learn to manage their money responsibly and carefully.
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