Finding ways to increase your kid’s knowledge of money and investing is tricky. That’s especially in a world of 30-second videos where anything that takes longer than a minute to explain can cause your little one to lose interest. Bonds, for example, are one of the best ways to introduce your child to long-term savings and low-risk investment opportunities. But the question remains, how do you get your child interested in, much less understand, the ins, outs, and values of bond types?
Today, we’ll cover everything you need to know to give your kid a financial advantage and a valuable lesson. Let’s get started.
How to Explain What a Bond is and The Different Types
Bonds are investment products that the local or federal government funds. At times, bonds can also be funded by corporations. But the most commonly known bond type is the Savings Bond. Since the Series E.E. bond is the most common and one of the few forms of investments that offer guaranteed returns, that’s what we’ll focus on. Here are some phrases to introduce savings bonds to your children.
“Having a savings bond means the government owes you money, and you can collect at any time. But if you hold the bond for a long time, the government will owe you even more money. And if you have a Series E.E. bond, the government will owe you twice the original amount in only 20 years.”
You could also try, “Savings bonds mean you’re investing in the government. And when you’re ready, you can trade in a bond for your initial investment plus interest.”
There are eight different types of bonds, each with its own complexities. Chances are the easiest ones to explain to your kid are traditional savings bonds. Plus, other bond types are less kid-friendly and better suited for experienced traders mainly because the risk for bonds outside of savings bonds is high.
But to satisfy your curiosity, here are all the bond types.
Savings Bond: The traditional bond that comes in Series E.E. and Series I. These bonds have fixed interest with a low rate
Municipal Bond: Municipal bonds help fund local and federal government projects. Is your county building a new rec center? There just might be municipal bonds available to buy.
Emerging Markets Bond: Governments of developing countries offer bonds. Buying an emerging market bond is equal to betting on the success of the said country.
Agency Bonds: Agency bonds are bonds offered by government businesses. Because the agencies are backed by the government, so are the bonds. Government-backed enterprises, or GSE, include Fannie Mae, Freddie Mac, and others.
Mortgage Backed Securities: Mortgage backed securities are shares in the housing market. Their values are based on local and national housing prices. Worth noting that they carry huge amounts of risk.
U.S. Treasury Securities: Treasury securities, also known as treasuries, are bonds issued by the federal government. Much like traditional savings bonds, treasuries are considered low risk. That said, there are three different types of treasuries, each with unique terms and interest yields.
Corporate Bonds: Corporate bonds, or corporates, are bonds issued by companies. In effect, they are similar to buying stock in the business. Companies use corporates to pay for business costs and fund new projects.
TIPS & STRIPS: These unique bonds shield investors from inflation. Similar to other federal bond types, TIPS are backed by the U.S. government. This means that assuming the bond reaches maturity; you’re guaranteed the initial cost. The downside is that other federal bonds often offer higher yields.
How to Explain Why Bonds are a Good Investment as Part of a Larger Portfolio
There are two big reasons that bonds are great for an investment portfolio. The first reason is that bonds are a great way to diversify your portfolio. The second is that they offer low-risk investing options with a guaranteed return. Of course, if you say that verbatim to your kid, it’ll sound like a different language. Here’s what you could say instead.
“Bonds can help ensure all of your eggs aren’t in one basket. Plus, most investing is really risky. But bonds are a lot less risky.”
You can also try, “There are tons of different businesses to invest in. Bonds are just like businesses in that there are many options.”
One of the most important lessons to teach a kid, or adult for that matter, is not to wager the bulk of your wealth on one thing. Focus on that principle; eventually, any finance-savvy little one will want to learn more.
Bond definitions and how to explain each one to kids
Here are a few key terms your kid will need to understand.
Annual Percentage Yield
The annual percentage yield, or APY, is the interest your bond can earn. An easy phrase to explain to a kid would be, “Bonds earn interest based on the annual percentage rate. The higher the APY, the more your bond can earn.”
The term is the amount of time money must be kept in a bond. I.E., the bond can’t be cashed out. Here’s a kid-friendly definition. “When you get a bond, you agree not to cash it in for X amount of time.” Or, “Bonds have to be held awhile. Otherwise, you’ll lose out on money.”
When a bond reaches its maturity date, it can be cashed out, closed, or reinvested. Explain this to your kid by saying, “Once the term ends, a bond reaches its maturity date. It’s a lot like a flower when it blossoms. Once the maturity date is here, you can use the money in the bond.”
The grace period is the time between a bond maturing and automatically reentering its term state. Here’s a nifty way to say that to kids, “Once a bond matures, it enters the grace period. You can do whatever you need with the bond when that happens. But if you don’t do anything, you’ll have to wait.”
Videos and Resources For Kids to Learn About Bonds
Elevate Data Stories offers a quick 5-minute video about the basics of bonds. It’s great for kids because it uses bright colors, cartoon settings, and everything a kid needs to focus. Check it out!
For kids, by kids, check out the Bonds for Kids video. It’s short but explains a lot about the basics of bonds. Check out the channel’s other videos on compound interest, stocks, economics, and more.
Growing Money is a great children’s book that covers the basics of savings and investing. It’s ideal for kids who prefer to read or require limited screen time. It’s got great reviews and even better info!
In short, bonds are an easy way to get your kid invested in investing! We will always suggest the move with the least amount of financial risk. With that in mind, we recommend starting with Series E.E. savings bonds. Also, teaching your kid what a savings account is is good before approaching bonds. Talks about savings accounts help lay crucial groundwork for bonds. Until next time!
Related Reading For You and Your Kids
- How to teach your kids about investing
- How to teach kids about stocks
- How to teach kids about money market accounts
- How to teach kids about mutual funds
- How to open a Roth or Traditional custodial IRA for your kids
- How to teach your kids about saving money
- Investing basics for kids
- Investing basics for teens
- Investing basics for college students
- Bonds explained for college students