11 Ways to Teach Your Kids About Investing

Teaching your kids about investing early in life can reap valuable rewards. There are monetary benefits, of course. Financially literate kids should have an easier transition to becoming financially independent adults -- that is, adults who don't borrow money from their parents or refuse to move out of the basement.

There are also broader life lessons embedded in the investment process. Successful investors must weigh risk and reward. They must be patient. They must make thoughtful decisions without knowing all the facts. Investors must also accept the consequences of those decisions, good and bad. Those are skills that can help your kid be more effective not only as an investor but also as an employee, friend, and spouse.

Here are 11 ways to share investing know-how with your kids, ordered from conceptual to practical.

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Kids old enough to communicate and count are ready to learn about the value of money. If they're younger than 4, this introduction could be as simple as asking them to count coins or bills for you.

As they get older, you can talk about the practical use of money -- that you trade it for things you need and want. As a simple demonstration, you can keep bills in a jar and then periodically use those bills to buy an ice cream cone (or an all-fruit smoothie).

You can work earning and saving lessons into this demonstration, too. Once you use the cash, it's gone, for example. You must replenish it somehow, usually by working -- which is also a type of trade. Or you can forgo the smoothie and keep adding bills to the jar. Then you'd have more cash to buy something bigger at a later point.

ALSO READ: What the Value of the U.S. Dollar Means for You in Real Life

Use paid chores to introduce the concept of value creation. You are willing to pay your kids to do jobs around the house because you get something in return -- more free time, usually.

In this context, you can discuss value. The more thoroughly the chores are done, the more value you receive for the payment. If the value to you drops too low, you're less willing to pay for the service.

As your kids get older, you can broaden the discussion and talk about how businesses create value through their products and services.

Ask your kids to define a financial goal the first time you pay them for chores. Stress the difference between spending the money now versus saving and having more later. If they want to spend their earnings right away, that can be their decision. At some point, they will probably want something and not have the cash. That's your teaching moment to encourage longer-term thinking.

If they are willing to set a longer-term goal, talk through how long the goal will take. You can also celebrate each time your kids set aside cash to reach their goal.

At some point, you'll want to upgrade the savings jar to an actual bank account. Doing so opens the door for discussions about interest and compounding.

You can start by explaining that the bank pays people who keep their money in that bank. If your kids have enough on deposit to earn interest each month, review the statements with them. Otherwise, show one of your bank statements.

Once you've covered the concept of earning interest, move on to compound interest. The idea that earnings can also earn interest, if they remain on deposit, is complicated. Be patient here.

If the bank statement doesn't provide enough context, you might try demonstrating compound interest with jars of coins or marbles. One jar can represent leaving the interest in the account to earn more interest. Another jar can represent taking the interest earnings out of the account monthly.

ALSO READ: How to Choose a Savings Account

A common investor mistake is not balancing risk and reward. That is, the potential for high reward always comes with higher risk, while lower-reward opportunities are lower risk. Sharing this wisdom with your kids should encourage them to make more thoughtful decisions. It may even keep them from getting burned by "get rich quick" opportunities.

If your kids are comfortable with the concept of earning interest in a savings account, turn the conversation to stocks and bonds. You can explain that cash, bonds, and stocks are three ways to earn, and each has its own risk level and reward potential.

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If you own stocks of known brands, like Walmart or McDonald's, talk about these positions with your kids. Discuss what you know about them and why you own them.

Use this context to introduce what it means to be a shareholder. This would be a good time to look over the company's earnings releases and other investor communications.

You can also talk about how the company creates value for customers and, in turn, for shareholders. Fun questions can encourage deeper thought on this topic. For example, "Would you still eat at McDonald's if they stopped serving fries?"

As you discuss your own investing activities, reinforce the importance of having a long-term focus. A compound earnings calculator can help you here. Use the calculator to show your older kids how earnings momentum builds over time.

This topic can easily segue into an introduction to market cycles and the tendency for stock prices to be unpredictable in the short term. Talk about long-term investing as a strategy for managing the market's inevitable ups and downs. You can show how this works by looking at stock charts for long and short time frames.

ALSO READ: What Is a Buy-and-Hold Strategy in Investing?

Kids who show a keen interest in investing will enjoy testing their skills risk free. They can do this in any online system that has a watch list feature. Or they can use an app like Invstr, which allows users to set up a $1 million portfolio and compete against others.

The drawback of simulators is that they can encourage short-term thinking. You'll likely have to explain the risks (and rewards) of real-life swing trading and day trading. On the plus side, a simulator encourages company research and analysis of how new information affects business performance.

It's a big step when your kids are ready to fund a brokerage account. Help them get set up and prep them for placing their first order. You can talk about liquidity as you help them decide how much they can afford to invest. This is also a good time to introduce the different types of orders, as in market orders, limit orders, and stop-loss orders.

If you're nervous about turning the kiddos loose on the stock market, you could alternatively allocate some funds to them in your account. This would ensure you remain part of the process. That's important because they can learn a lot just by talking through their decisions with you.

It's smart to ask your kids to pitch you on their first stock buy. This gets them thinking about why they want to buy the stock and what they're trying to accomplish. Be warned, though. Your teenagers might think this step is silly.

As they make their case for the stock buy, your job is to ask clarifying questions -- delicately. You obviously don't want them to get defensive or argumentative. You do want to inspire analysis and (subtly) reinforce the idea that good investors don't make decisions lightly.

At the end of the pitch, your kids will probably have a better grasp of their own investing approach. Encourage them to document that approach and add to it over time as they gain experience.

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Going forward, be there to help your kids with their investing questions and concerns. For the short term, schedule a recurring review of their portfolio -- even if it's just the one stock.

Together, you can look over company and industry news. You can discuss factors that might change your outlook on a stock. You can celebrate the ups and commiserate on the downs.

Look for opportunities to pull more lessons into those conversations. For example, stock price corrections present a good opportunity to talk about asset classes and diversification.

If all goes well, your investing review with the kids can evolve into your own family investing club, where you're learning and growing from one another.

ALSO READ: Form an Investment Club

Showing your kids the ropes of investing gives them the know-how to achieve long-term wealth. Lay the right groundwork, and they should develop a healthy respect for money and value creation, the analytical habit of weighing risks and rewards, and the discipline to pursue goals that take decades to achieve.

And who knows? Your early investing lessons might encourage one of your kids to be the next Mellody Hobson or Warren Buffett. While your friends are trying to get their adult children to move out of the basement, you can rest easy knowing your kids have the skills they need to be successful.

Catherine Brock owns McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.