Tough Money Conversations With Kids

If you’re going to help your kids learn about money, getting them started is one thing; keeping them going is another. Motivation can wane.

That’s what seemed to be happening the other night with one of our kids when he opened up a conversation about investing. Don’t get me wrong. It’s not like the wheels have come off, with him wanting to cash out in favor of buying some stuff right now. But I can tell that some hard realities are setting in. Like the long time he may have to wait for the payoff.

The hard work of waiting

As I’ve written before (see What If Your Kids Had Their Retirement Funded Before They Finish High School?), we helped each of our three kids open investment accounts when they were 15, 12, and 10 and encouraged them to follow the most aggressive strategy offered by Sound Mind Investing, where I work. While we suggest that older investors devote no more than 20% of the equity portion of their optimal asset allocation to the Sector Rotation strategy, I explained to our kids that they have time on their side. As long as they can handle the volatility they’ll likely experience, their long time horizon should give them a great chance of generating impressive long-term average annual returns. (The strategy has averaged 12.5% per year since 2000.)

It’s been an up and down experience for our kids. They knew going in that it would be that way but theory and reality are two very different things. Still, I’d far rather have them experience market declines while they’re still living at home, where we can easily talk about it. And they’ve handled the volatility just fine.  

But recently, one of our sons asked me some questions about his account. He wanted to know how long he’d have to wait before he could use some of the money. And then he asked how certain it was that the strategy would generate great returns long term.

The questions caught me a little off guard, and honestly, I was worried that he was rethinking this whole investment thing. It surprised me because he’s been so diligent about adding to his account.

Beginning with the end in mind

I told him he could take a lot of his money out right now if he wanted to. It’s his money. And it’s in a Roth IRA, where contributions can be withdrawn with no penalty. I also explained, as I have before, that the returns are not guaranteed. The 12.5% figure is an average of how the strategy has performed since 2000. It could perform better than that, and it could perform worse. Either way, there will likely be some very good years and some very bad years.

I then tried to remind him of some of the long-term benefits of starting this investment account at such a young age. If he could build the account to $3,000 by the time he’s 18 and then never added another penny, and if it continued generating a 12.5% average annual return, by the time he’s 70, it would be worth nearly $2 million!

I also told him that when he’s working a full-time job, having this account set up would take away a lot of pressure to set aside so much for his later years. If his company offered a match on a 401(k) plan, which I explained, he should absolutely invest enough to get the full match. But beyond that, he’d be free to save and invest for other things, such as a house or maybe his own business. It would give him options that a lot of other people don’t have.

He took it all in and seemed satisfied with the conversation. Not excited, but perhaps at least content to stay the course.

Using real money in the real world

It’s tough. I get it. It’s a long time to wait for the payoff. But all of this—the questions, the disappointment, the grappling with the patience required—is why it’s so important to get kids in the conversation about money, and in the game with actual money, early. I want them to wrestle with this stuff while they’re still living at home.

I’ve heard that the reason so much of the financial literacy efforts taking place in schools hasn’t been effective is that it’s too theoretical, too abstract. Kids need to have real money involved if lessons are going to stick.

Yes, we need to teach. And we need to do our best to be good role models, which is why we talk about things we’re saving and investing for—things we’re waiting for. But the regular conversations—the opportunities for kids to ask questions and wrestle out loud with some of the things they’re sorting out—may be the most important part of the process. 

For a comprehensive approach to teaching your kids a biblical approach to money, pick up a copy of my new book, Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management

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