What you learn as a child stays with you for the rest of your life. That's why parents should introduce the concept of investing to children as early as possible.

Explain concepts
When you talk to your child about investing, point out the difference between money that you save to buy something special in a month or two and money you save for a long time for some future event, like buying a car or going to college. Explain that the money will grow over the years by earning interest, not sitting in a bank at home. Establishing a Growing Bank at home helps kids keep the money until there is enough to invest.

First set a target sum of money to save, say $50, or whatever is appropriate at your child's age. When you've reached that goal, it's time to move the money out of the Growing Bank and into a savings account where it will earn interest. Explain to your child that this is the first step - there are other places to put money that typically earn more interest than a savings account.

When the savings account has grown to $500, it's time to move the money again. Explain to your child which investment you are going to choose to help his or her money grow. For older children, you may also want to discuss how the investment works and gradually let them take control of their investment choices.

Choosing investments
Risk is really a concept for older children. It might make younger children nervous about the safety of their money. So you might want to start your younger children off with Canada Savings Bonds because the federal government backs them. Guaranteed Investment Certificates (GICs) are another option.

If you put your older child's money in a non-guaranteed investment, such as mutual funds or stocks, make an activity of tracking the money's progress: you and your child should watch the newspaper or go on the Internet to see how the investment is doing. If the investment dips, don't react in a way that will make the child anxious. Keep sending the message to your child that the money will have its ups and downs, just as we all have good days and bad days.

Many people think mutual funds are a good place to invest because they are professionally managed, they diversify your investments, and allow you to redeem your shares quickly. There are different kinds of mutual funds for different investment needs. For a novice investor, there are generally only two types of mutual funds to consider:

Bond funds. When a business or government
needs to borrow money for a long period of time, it might issue bonds. Bonds are the financial obligations of the corporation or government that issues them. When an individual purchases a bond, that individual is loaning money to the issuer. Bond issuers promise to make regular interest payments on the money they borrow and to repay the amount they borrowed when the bond matures. Because bonds usually pay interest at a set or fixed rate, they are called fixed-income investments. If you are looking for more return potential than that offered by a GIC, and less risk than a stock fund, a bond fund might be your best investment choice.
Stock funds. An investor who buys stock in a company receives equity - part ownership - in that company. A stock mutual fund pools the money of investors to purchase stock shares of many different companies. That's why the fund's share price will go up and down with the stock market. This is called volatility. If you have to sell your shares when the market is down, you may lose money. But if you are able to maintain a long-term focus - more than five years- your investment in a stock mutual fund has the potential to ride out short-term market volatility and grow over time.

While these last two options are for more advanced investment-minded kids, you can have a lot of fun tracking those mutual funds on the Internet. You will also be teaching valuable lessons to your child about capitalism and how even a single individual can have an impact on the future by choosing wisely where his money should be invested. However, that gets us into the realm of ethical investing and that's the subject for a future column all on its own!

Mike Dupuis, MBA, CFP is with Unity Financial in Cobourg. He can be reached at 905-372-3535 or mikedupuis@sympatico.ca.