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What’s the best gift to give a child? Books and games are up there. A good education is vital. A safe and loving home, of course. Here’s a supremely valuable gift you may not have thought of: a financial education.

Without financial literacy and some money management skills, your children may grow up and quickly find themselves in debt and living beyond their means. They may even end up needing your financial support when you’re retired and need those dollars yourself.

Image source: Getty Images.

Here’s how you can get young people off to a great start, financially — by teaching them vital lessons about money. Each of the following suggestions can be adjusted to best fit your kids’ ages and personalities.

Start with the basics

Start by just talking about money whenever it’s relevant during your day-to-day lives. If you’re shopping with your children, you might discuss how you’re looking for items on sale or comparison-shopping to save money.

You can have them watch you pay bills — and learn how much it costs to have electricity, heat, or a cell phone. If you’re in debt and are paying it off, show them how that’s going, and share any lessons you’ve learned, such as how dangerous and regrettable it is to rack up lots of debt on costly credit cards. Teach early money management by giving them an allowance and/or encouraging them to earn some money by doing chores or taking on small jobs, such as babysitting or mowing lawns. One great idea is to have them divide their money into three, spending a third on whatever they want, saving a third, and giving away a third.

The magic of compounding

As you’ll want them to become lifelong investors, be sure to discuss the power of investing, such as in the stock market, where money has grown at an average annual rate of 10% or more over long periods. To help them appreciate how powerfully money can grow via compounding, show them the tables below.

This one shows how much a single investment of just $1,000 can grow to, at an average annual rate of 8% (because no one should count on 10%, as it’s just a long-term average):

Over this period…

$1,000 will grow to:

5 years

$1,469

10 years

$2,159

15 years

$3,172

20 years

$4,661

25 years

$6,848

30 years

$10,063

35 years

$14,785

40 years

$21,724

45 years

$31,920

50 years

$46,902

55 years

$68,914

60 years

$101,257

Source: Calculations by author.

That should be fairly eye-opening. But the table below may blow their minds:

Growing at 8% for

$1,000 invested annually

$3,000 invested annually

$5,000 invested annually

5 years

$6,336

$19,008

$31,680

10 years

$15,645

$46,936

$78,227

15 years

$29,324

$87,973

$146,621

20 years

$49,423

$148,269

$247,115

25 years

$78,954

$236,863

$394,772

30 years

$122,346

$367,038

$611,729

35 years

$186,102

$558,306

$930,511

40 years

$279,781

$839,343

$1.4 million

45 years

$417,426

$1.3 million

$2.1 million

50 years

$619,672

$1.9 million

$3.1 million

Source: Calculations by author.

The tables show how they can amass hundreds of thousands of dollars, if not millions, just by being diligent and patient. Point out how important time is and how fortunate they are to be very young, because any money they invest will have a long time to grow.

Image source: Getty Images.

First investing steps

Introduce them to the stock market by explaining what stocks are — actual stakes (though small ones) in actual companies. If you own a few shares of Southwest Airlines (NYSE:LUV), for example, you are a part owner in the company.

Help them identify companies that interest them, and make a list. Think about companies whose products or services they use or love. Think about products and services all around them. Here are a bunch of contenders, though your particular kid(s) might have some special interests, with different companies best suited for them:

Have your kids pretend to invest in the companies they’re interested in. You can set up a portfolio at sites such as Yahoo! Finance, entering various stocks and pretending you bought a certain number at their current price. Then you can check the portfolio’s progress every week or so, to see how it’s doing. When any stock moves significantly, look up what news there is — perhaps a strong earnings report has boosted one stock, while a faulty product has caused another to drop. Ideally, your kids will learn that not every stock will be a great investment.

You can even get your kids investing for real — perhaps by setting up a custodial brokerage account. They’ll likely lose some money, at least over the short term, so be sure to help them understand that not all investments work out and that patience is required. Also, the more they learn about investing and about how to assess the quality and price of a company and its stock, the better they can do. (The Motley Fool Guide to Investing for Teens might be of interest.) Remind them about those tables up above, and how a growing nest egg can give them financial security for life and can help them reach their goals and dreams.

There are few gifts you can give your kids more valuable than the gift of financial know-how. Help your young people start good financial habits early that can pay off for the rest of their lives.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.