How to Teach Kids About Investing and Building Financial Skills

Understanding how money works is a skill that benefits children for life, yet financial education is often overlooked. Teaching kids about investing early helps them develop smart money habits and confidence in managing their finances. By introducing these concepts gradually, parents can make learning about money engaging rather than overwhelming.

Making investing relatable to kids starts with simple steps and real-world examples. With the right approach, children can learn to save, set goals, and track their progress in a way that keeps them motivated.

Encouraging Saving Before Investing

Before children can grasp investing, they need to understand saving. Without a habit of setting money aside, the concept of growing wealth through investments can feel abstract. Teaching kids to save first helps them see the value of delayed gratification and financial discipline. A simple way to start is by introducing short-term and long-term savings. Short-term savings can be for things they want soon, like a toy or a game, while long-term savings can be for bigger goals, such as a bike or even future education.

Providing a designated place to store savings reinforces the habit. A clear jar or piggy bank works for younger kids, while older children can benefit from a savings account at a bank or credit union. Many financial institutions offer youth savings accounts with no fees and low minimum balances, making them accessible. Seeing their balance grow helps kids connect their actions—saving money—with tangible results. Some banks even provide online tools that allow children to track their savings, making the process more engaging.

To keep them motivated, parents can introduce incentives. Matching contributions, similar to how employers match 401(k) contributions, can encourage kids to save more. For example, if a child saves $10, a parent could add another $5. This not only rewards their effort but also introduces the idea of earning additional money through financial decisions. Another approach is setting savings challenges, such as saving a certain amount by a specific date, with a small reward for reaching the goal.

Simple Ways to Explain Stocks and Bonds

Investing can seem complicated, but breaking it down into familiar ideas makes it easier for kids to understand. One way to explain stocks is by comparing them to owning a small piece of a company, similar to how they might own a slice of pizza from a whole pie. If the company does well—like a popular pizza shop that attracts more customers—their piece of ownership becomes more valuable. If the business struggles, their share might be worth less.

Some companies distribute dividends, similar to how a lemonade stand might set aside some of its earnings to give back to those who helped buy ingredients. If a child owns stock in a company that pays dividends, they receive money just for holding onto their shares. This introduces the idea of passive income—earning money without actively working for it.

Bonds work differently since they don’t represent ownership in a company. Instead, they function like a loan. A relatable example is if a child lends a friend money to buy a toy, expecting to be repaid later with a little extra as a thank-you. When someone buys a bond, they are essentially lending money to a company or government, which promises to pay back the original amount plus interest. Unlike stocks, bonds tend to be more stable, making them a safer option for those who prefer less risk.

Exploring Custodial Investment Accounts

Opening a custodial investment account allows parents to begin building wealth for their child while also teaching them how investing works. Unlike a standard savings account, these accounts hold stocks, mutual funds, or ETFs in the child’s name, managed by a parent or guardian until they reach adulthood. The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are two common types. UTMA accounts allow a broader range of investments, including real estate and patents, while UGMA accounts are limited to financial assets like stocks, bonds, and cash.

Taxes work differently for custodial accounts compared to standard brokerage accounts. Because the assets belong to the minor, they benefit from lower tax rates on unearned income. In 2024, the first $1,300 of investment income is tax-free, the next $1,300 is taxed at the child’s rate, and anything above $2,600 is taxed at the parents’ rate under the “kiddie tax” rules. This structure can be advantageous compared to holding investments in a parent’s name, but it’s important to consider how future withdrawals may impact financial aid eligibility for college. Since custodial accounts count as student assets, they can reduce financial aid by up to 20% of their value, making them less favorable than 529 plans for education savings.

Beyond tax considerations, custodial accounts teach children financial responsibility. Parents can involve kids in selecting investments, reviewing performance, and discussing market trends. This hands-on approach helps them understand risk, diversification, and long-term planning. Unlike trust funds, which often have strict conditions on withdrawals, custodial accounts fully transfer to the child at the age of majority—18 or 21 depending on the state—giving them full control. While this can be a great opportunity for financial independence, it also requires guidance to ensure they make informed decisions rather than spending the funds impulsively.

Demonstrating Compound Growth

Understanding how money grows over time can be eye-opening for kids, especially when they see that investments don’t just add value—they multiply it. The concept of compound growth can be introduced by illustrating how reinvested earnings generate even more earnings. A simple way to demonstrate this is by comparing it to planting a tree: initially, there’s only a small sapling, but as time passes, it grows branches, which then produce seeds that lead to even more trees.

One way to make this tangible is by using an investment calculator to show how a small initial amount, combined with consistent contributions, can grow significantly over the years. For example, if a child invests $100 with an annual return of 8% and adds $10 a month, they would have over $3,000 after 10 years—not just from their contributions, but from the accumulated returns on previous gains. Seeing these numbers in action helps children visualize why starting early matters.

Involving Kids in Setting Goals

Once children understand how investments grow, the next step is helping them set financial goals. Having a clear objective makes investing feel purposeful rather than abstract. Whether they are saving for a long-term purchase, future education, or simply learning how to manage money, defining specific targets gives them a sense of ownership over their financial decisions. Parents can guide this process by discussing different types of goals—short-term, medium-term, and long-term—and how investing can help achieve them.

Breaking down goals into measurable steps makes them more manageable. If a child wants to save $500 for a future expense, they can determine how much they need to invest each month and estimate potential returns based on different growth rates. This introduces the concept of risk and reward, as they see how more aggressive investments might grow faster but come with greater uncertainty. Encouraging kids to write down their goals and track progress reinforces the habit of financial planning, making it more likely they will continue setting and achieving financial milestones as they grow.

Tracking Progress Together

Once a child begins investing, regularly reviewing their progress keeps them engaged and reinforces financial literacy. Checking account balances, discussing market trends, and evaluating investment performance together helps them see how their decisions impact their portfolio. Instead of focusing solely on short-term gains or losses, parents can emphasize long-term growth by showing historical market trends and explaining how patience plays a role in successful investing.

Using visual tools like charts or spreadsheets can make tracking progress more interactive. Some brokerage accounts offer dashboards that display portfolio performance over time, allowing kids to see how their investments fluctuate. Reviewing these changes together provides opportunities to discuss why certain stocks or funds performed well or poorly, reinforcing lessons about diversification and economic factors. Encouraging children to ask questions and make small investment decisions based on their research fosters independence, helping them build confidence in managing their finances.