Save, spend, share, invest: Four ways to use your money — Part 4
Investing money can lead to financial returns for youth.
There are four decisions we can make with our money: save it, spend it, share it or invest it. Understanding these differences is important to managing our money well. Michigan State University Extension takes a closer look at what each of these terms mean and how we can help youth understand them.
Investing money is a way to use money with the intent to make more money in the end. This is usually a longer-term decision and plan. Investing money is similar to saving money in that students should have SMART (Specific, Measurable, Achievable, Realistic and Time-Bound) financial goals they are working towards.
Learning about investments early in life can pay off. Money in interest-bearing accounts grows through compound interest, which means that the longer the money is in that account, the more it will grow. Compound interest is calculated on the initial money deposited as well as the ensuing interest; as the money adds up (initial deposit plus interest), there is more money to grow interest.
When a child is saving money towards a large purchase such as sports equipment, it may make sense to open a savings account. This account will earn a small amount of interest and provide a record-keeping system. When they are saving money towards a more long-term goal, such as college or buying a car, it may make more sense to look at investment accounts. These accounts will require longer-term commitments, but will yield larger interest rates.
Youth can learn more about various investment options, such as certificates of deposit (CDs), stocks, bonds and mutual funds, through educational resources such as “My Financial Future.”
Investing money can also be a risk, as there is no guarantee certain companies will do well enough to earn more money. Most investment companies will ask clients about their risk tolerance in order to determine the appropriate mix of higher risk options and safer options.
Learning about investments can be an interesting new way to talk about money with youth. Read the other articles in this series on saving, spending and sharing money to help you talk about money topics with kids.
Michigan State University Extension and Michigan 4-H Youth Development help to prepare young people for successful futures. As a result of career exploration and workforce preparation activities, thousands of Michigan youth are better equipped to make important decisions about their professional future, ready to contribute to the workforce and able to take fiscal responsibility in their personal lives.
To learn about the positive impact of Michigan 4-H youth career preparation, money management, and entrepreneurship programs, read the 2016 Impact Report: “Preparing Michigan Youth for Future Employment.”