As parents, there's no bigger hope than to provide a better future for our children. Investments are a vehicle that can help us achieve this goal.
The first rule of thumb of investing is that the money used is money that you won't need to use for emergencies, so it can be kept invested for years to come. (Stash money that you might need within six months into an easy-access savings account instead.)
To teach kids about building wealth — the expectation of making and having more money in the future — kids need to understand the basics of risks and rewards. Unlike a savings account, investments come with the risk of losing some or all of its value while the reward is the potential of money gain over time (which is comparatively low for even an interest-yielding savings account).
So what's a good way to explain this in a concrete way kids understand?
My nephew loves rollercoasters. This is how we explained risk and reward: A ride in a classic rollercoaster (no loops, just a few hills) is less exciting than riding an inverted rollercoaster filled with loops, corkscrew turns and spirals.
Therefore, the risk/reward relationship — the thrill of the ride — is lower when you ride the classic rollercoaster. On the other hand, the reward — the exhilaration of riding the inverted rollercoaster — is through-the-roof high! But… you could lose your sunglasses or cellphone (or your lunch, yikes!) on this kind of ride.
Yoly Mason, a blogger living in Orlando, Florida, wants to live in a world where Latinas can enjoy an abundant life with a small budget and where being in debt is as out of style as the rotary phone.
Image via iStock