In professional sports, players are supremely talented. Yet even all-stars play under coaches. It’s the same for your children when it comes to personal finance, including their retirement planning down the road.
Whether your kids are young or old, whether they’re top of their class or middle of the pack, slightly experienced or totally new to handling their personal finances, they’ll benefit from your guidance. You can speed up their learning curve. You can steer them away from potentially costly mistakes. You can get them started early on saving and investing, putting the power of time to work for them, building their retirement savings bigger sooner, boosting the size of their regular accounts too.
If you haven’t already started to do that, start now. After all, April is financial literacy month, which means it will be easier than ever to find online advice and tools. Here are seven steps you can take toward improving their financial literacy and beefing up their personal-finance IQ.
1) Assess your knowledge. “Many people don’t know what they don’t know,” said Erin Meijer, director, Thought Leadership and Content Strategy at Guardian Life Insurance Company of America. “To figure out where you need help, start by taking any of the many online quizzes designed to show someone what they know and what they don’t know.”
Consumer educator and personal-finance author Pamela Yellen offers a quiz at her own Bank On Yourself website . Her quiz tests a person’s knowledge about topics ranging from the performance of the Dow Jones industrials, which include stocks such as diversified conglomerate General Electric ( GE ) and computer chipmaker Intel ( INTC ), to how to measure the true cost of buying a car.
She also recommends taking the American College retirement literacy quiz , which focuses on financial-advisor education. There’s also a Finra quiz , offered by Finra (Financial Industry Regulatory Authority), the self-regulatory organization that governs some aspects of the securities industry.
2) Form a long-term financial plan . “Once a person has assessed their strengths and weaknesses, they should look up the things they don’t know that are key elements of any financial plan,” Meijer said. Key elements include identifying each major financial goal, assigning a cost to each goal and giving each goal a time horizon.
Other key elements include determining their risk tolerance and choosing a mix of assets like stocks and bonds that fit their risk tolerance. For instance, a twentysomething who brims with confidence can probably afford to invest aggressively. After all, he has plenty of time to rebound from a market setback. He can afford a 100% stock and stock mutual fund portfolio.
In contrast, a 68-year-old who plans to retire soon may want his asset allocation to include some shock-absorbers like bond funds or individual bonds. But in this rising interest rate environment, he might well want to limit his duration risk by focusing on bonds that mature in no more than two to three years.
3) Fill in the gaps.
- If your young loved ones don’t understand what concepts like time horizon or risk tolerance mean, then you should encourage them to do homework to look for answers. Show them websites at big financial firms that have tutorials that explain such terms.
You can find those by Googling for, say, ” Charles Schwab ” or “Fidelity Investments” and whatever term you want to look up.
4) Build and maintain a budget. Teach your youngsters how to list their expenses and compare them to their income. Building a budget is an essential part of any financial plan. Also, a budget is a key tool for anyone who wants to determine their ability to reach their financial goals. In addition, a budget is also a big help when your kids leave the nest and get their first apartment or home. It’s a tool that can help them keep their household finances in good health and avoid ruinous overspending.
“Knowing how to build and maintain a budget is one of the basic building blocks to financial literacy and to knowing how to use money to build the life that you want,” said Dennis Duquette, head of MassMutual Community Responsibility and president of the MassMutual Foundation.
5) Introduce your children to the stock market. The SIFMA Foundation – a nonprofit educational organization affiliated with SIFMA, a trade group representing securities firms, banks and asset management companies – operates the Stock Market Game, an interactive online game that aims to teach players the basics of investing.
The game is designed for students in grades 4 through 12. Different versions are offered to various age groups. Players start with a virtual kitty of $100,000. They invest in stocks, bonds and mutual funds, using news and data that the game provides. Adults can also play.
“The program gives people real-world experience using the capital markets without the risk of losing real money,” said SIFMA Foundation President Melanie Mortimer. “And we think a key to learning is to make the process fun. And that’s what this does for learning how to invest .”
6) Learn by doing. “Have your children start small,” said Brandon Krieg, CEO of Stash, an automated investing platform. “Have them open a savings account. Get them to start a retirement account. Even small contributions can add up over time. They can always increase the size of their contributions. They’ll get smarter with every step.”
7) Start today. The sooner your children start to learn about personal finance, the sooner they will start to invest. And time is the best tool anyone has for building their portfolio. “Compound growth is very powerful,” Guardian Life’s Meijer said.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.