My two boys, James (age 6) and Max (age 10), believe the cliché phrase that money “grows on trees.” They live in the make-believe world of V-Bucks (i.e., video game currency) and erroneously think that a credit card can be used to buy anything they desire and no one actually has to pay for it. “Just put it on your credit card, Daddy,” they often say. Given all this, my wife and I decided the boys were ready to start learning about “handling” their own money, as well as how to invest it.

Keep It Simple

From what we have read, there really is no right or wrong age to teach your children about financial matters. Like most aspects of parenting, it may be based simply on a feeling about their actual readiness for something. One of the most important parts of teaching kids about money is to keep it simple but also to realize that, like investing, it is a long-term process, not a short one. Keeping it simple means no big terms or concepts for them to comprehend. You don’t want to do a deep dive on option strategies for making money on the volatility of the Hang Seng stock market!

The Learning Journey

After researching strategies, we embarked on this learning journey by explaining to the boys that they should divide their money into four distinct buckets: one for spending, one for saving, one for investing, and one for charity. After they bucketed their monies, we discussed the concept of opportunity cost. I explained to James and Max that if they chose to spend all their money, they would have none left for the other three buckets. My kids, like most, didn't care about that fact at all; however, that changed once they understood the power of compounding.

One of the best ways to illustrate the power of compounding comes from how Kevin O’Leary (aka Mr. Wonderful from the TV show Shark Tank) taught his kids about this power. He gave each of his kids a glass piggy bank to store their money. Each night while they slept, he would slip a few extra pennies into each one. When they woke up, they could see that they were making extra money while they slept. Warren Buffett explained the power of compounding as “being at the top of a very large hill with wet snow and starting with a snowball and getting it rolling downhill.” With this concept well embedded in my boys’ minds, it was time to move on to a few other key terms.

Defining the Terms

We explained that “buying a stock” meant that they owned a piece of that company. If that company did well, then generally that stock would do well and make money for them. We told them that “investing” some of their monies would be a means of using their money to make more money. Finally, we walked through the ideas of “risk” and “reward,” including how they are related. That is, if they invested their money, there was a risk that they may lose money but that taking on that risk was necessary to reap a possible reward of making more money on their stock picks.

Learning in Action

My kids, like many, learn best when the concepts are applied in real life, as well as when the learning experience is fun and interesting. We started by creating a virtual stock market game where each boy chose a company to invest in (not using real money). Max chose Nike because, as a fashion diva, he won’t wear anything without the Nike name on it. James chose McDonald’s, because he loves it (not so much for the food but for the Happy Meal toy)! It was important that they chose companies that they could relate to so that they would be more interested in the results of the game. Also, individual stocks are easier for them to get excited about, understand, and track than mutual funds or ETFs. Throw in the natural sibling rivalry and it was game on! I used a spreadsheet to track each boy’s stock pick’s performance. There are apps out there that can do the same (e.g., InvestingNote and Stocks Live).

In addition to this game, I would sometimes interrupt James’s viewing of SpongeBob SquarePants so we could watch a little bit of news on the markets on CNBC with them. My wife and I would discuss their specific stocks/companies, as well as reasons why the markets were up or down on a given day. Other teachable moments involved discussing our investments in our 401(k) plans and sharing stories about stocks that we had bought in years’ past and how those investments turned out. No, we did not put them to bed by regaling them with investing lessons from Warren Buffett!

Once we felt comfortable with their level of investing knowledge, it was time for them to invest for real. There are a few ways for kids to do so. One way is to gift them shares of stock. There are companies that will help with this and even send a framed stock certificate to the recipient. Another option is through an app called BusyKid, which allows kids to use their allowance money to purchase shares of stock. We went with an app called Stockpile. It allows users to purchase fractional shares of stock, which makes it much more feasible to buy some ownership in well-known companies.

Making the Grade

All learning usually requires some sort of grade. So, how did we do as parents on teaching our boys about investing? I would cop out and give us a grade of “incomplete” for now, as this is a subject that will require many more years of teaching and learning. I do feel that by helping them learn about investing now, they will make better money decisions in the future. Although I don’t foresee James or Max taking over my job as an investment consultant any time soon, I do think that they have gained some valuable investing knowledge—and have some idea about what daddy talks about at work.

Editor’s Note: The original version of this article appeared on the Independent Market Observer.