There are some conversations with your kids you don’t really look forward to. “Mom, Where do babies come from?” is certainly one of them, as are the topics of safe sex, disease, death, and – yes – investing.
But the more experience I have under my belt as a mom, the more confident I am that even the most difficult, complex subjects can be simplified enough so that young children can understand them. In fact, the very need to simplify a complex topic so that a child might be able to grasp it makes many difficult topics much easier to explain. When you get rid of the subtle nuances that complicate adult behavior and interaction, what remains is often straightforward and not too difficult to understand.
Take a recent conversation I had with my ten years old daughter about investing. She had overheard her dad and I talk about our investments and about inflation, and wanted to know what inflation meant, why we were worried about it, and why we needed to invest our money to fight it.
At first I was taken aback by the complexity of the topic. How do you explain inflation and investing to a ten-year-old, when plenty of us grownups barely grasp the complexities ourselves? Then I reminded myself: Keep it simple, stick with the very basics, use examples from the child’s own life, and all will be well.
So this is what I said:
“Suppose you get a N100 bill for your birthday. This is a nice gift, right? You can use it to buy maybe 3 Nintendo games. But you decide that you don’t need any new games, and you put the money in an envelope and eventually you just forget about it. 30 years from now, you’re 40, right? And you suddenly find that envelope tucked into one of your old books. You take the N100 bill out of the envelope, but you don’t get excited at all, because 30 years from now, N100 will not buy you 3 games. It will buy you 3 pieces of gum!”
As she looked at me in disbelief, I continued, “This is inflation. Inflation means that the same amount of money will buy less and less as time goes by. That’s why we can’t just put money aside. Unless we plan to use money soon, we need to put it someplace where it will grow. And putting your money someplace where it will grow is called investing.”
I continued to explain that once you decide to invest the N100, you have a few options. You can put the N100 in the bank and grow it just enough so the same N100 will still buy you 3 games 30 years from now. Or you use the N100 to buy a tiny part – a share – in a company, and as that company grows, your N100 will grow too, and in fact chances are those 30 years from now, they will grow enough to not just buy 3 games, but maybe 6 games! So you will not just fight inflation, but also make more money than the amount you started out with.
Admittedly, this was a very simplistic and somewhat inaccurate explanation of the concepts of inflation, saving and investing. For instance, I don’t know if 30 years of inflation will mean that the N100 of today can only buy 3 pieces of gum in 2040. But it was something that a ten year old could understand and relate to. And it enabled me to spark her curiosity and interest about the power – and the importance – of investing.
