The following story is part of the Grandpa Moneybags series. Created by Hurlow Wealth Management Group, Grandpa Moneybags is a fictional character who shares lessons that parents and grandparents can use to teach the next generation of wealth holders.

Grandpa Moneybags: What Is Investing?

by T. Claire Kest, CFP®, CAP®

On the Friday before Labor Day, like clockwork, Charlie Hill, a.k.a., Grandpa Moneybags, woke up early to plant his fall mums and change the wreath on his front door, like his late wife, Elizabeth, did for so many seasons. He was excited for the upcoming arrival of his daughter and his grandsons. As he worked, he went through the mental checklist. They would take the boat out on the lake for one last hoorah before the weather changed.

That evening, as he is putting the finishing touches on the spaghetti dinner, he hears his doorbell ring. Bobby and Keith come barrelling in a second later, running up the stairs of the split foyer home.

"Grandpa, we're here!" Bobby yells.

Charlie wipes his hands on a kitchen towel, clicks off the stove, and wraps up his grandsons in each arm.

Katie, his daughter, comes up behind the boys carrying a plate of cookies and an overnight bag. "Hi Dad," she says, leaning in to kiss his cheek as his hug breaks up with the boys.

"Hi, Sweetheart. Dinner is almost done. Now, as for you two..." he said, turning to his grandsons. "You are probably expecting some cashola." Bobby and Keith looked at each other sheepishly and shrugged.

"Well, I do have some money I want to give you, but it will be a little different this year. Let's eat first."

After dinner, Charlie counted out two piles of ten-dollar bills on the kitchen counter while the boys sat on the stools watching.

"I've been thinking since you started calling me Grandpa Moneybags, about what a tremendous honor and responsibility I have to help you learn about money. So, I thought I would start with the basics. There are four things you can do with money." While he spoke, he pulled out a stack of envelopes from the desk drawer and placed them in front of Keith and Bobby. Each envelope had a word written on it, and as he put them down, Charlie read the words out loud: "spend", "save," "give," and "invest."

"Now you each have four envelopes, and you get to decide what you are going to do with this $100. You will put some money in each of these envelopes. How much is up to you.

You know all about spending, and saving is just like spending, except you hold onto it for a little while longer. It's like emergency money, or when you want to buy something expensive. We'll discuss giving more at another time, but essentially, we donate a portion of our earnings to organizations that help people who have insufficient food, clothing, or safe housing.

I do, however, want to spend a little time talking about investing.

What do you know about stocks or bonds?

"A stock is like owning a piece of a company," Keith said proudly.

"Aunt Abby said she bought me a savings bond when I was a baby, but I don't know what that is," Bobby offered.

"It's like when you give the government a loan and they pay you back later with more money. It's called interest. I learned about this in 7th grade. We got to play a stock market game," reported Keith.

"That's very good, Keith. I'm glad your school teaches you about investing. Lots of schools still don't teach any personal finance.

We are going to play a stock market game, although I will actually invest the money you decide to set aside. Let's start by naming big companies. Name as many as you can."

The boys looked around the room for inspiration.

"Nike!" Yelled Bobby, lifting up his sneaker.

"What about Amazon?" said Keith, noticing the packaging from a recent delivery.

"Cheerios?" Bobby said, hesitantly looking at the pantry.

"Cheerios are a product manufactured by the company, General Mills, but that is certainly a big company." Grandpa Moneybags gently corrected.

"Our car is a Honda, and we stopped at McDonald's on the way down here," Keith added.

"I was going to say McDonald's," Bobby complained.

"I'll give you a hint, Bobby. What is a drink that you might get from McDonald's?" Grandpa Moneybags suggested.

"Sprite? Replied Bobby.

"That's right, and The Coca-Cola Company makes Sprite. Where do you go to buy food?" Challenged their wise grandfather.

"Kroger!" The brothers shouted in unison.

"You can buy stock in a grocery store?" Questioned Keith

For the next 20 minutes, Grandpa Moneybags drew a map illustrating how money flows from a store to investors. He described the differences between small companies and large companies, naming various ways that companies could be classified.

"I'm going to name three companies, all of which were originally headquartered in the United States, but only one of them is. Which one is still a U.S. Company: Burger King, Ben & Jerry's, or Costco?"

"Ben & Jerry's is in Vermont." Guessed Bobby. "We went there on that fall break trip."

"Doesn't Costco stand for Chinese Offshore Trading Company?" That's not American. I'm with Bobby, I'd say Ben & Jerry's." Keith agreed.

"It's actually Costco that is the American company, headquartered in Washington State. Ben & Jerry's does have a Vermont factory, but they were bought by the British company, Unilever, in 2000. A Canadian company, RBI, owns Burger King."

Grandpa Moneybags continued, "So, when you invest, you want to pick companies of different sizes, industries, and from different countries to reduce the risk that if one company, industry, or country performs poorly, the value of all your holdings won't decline so badly. That's called diversification. The best way to diversify is through the purchase of Exchange-Traded Funds (ETFs), rather than individual stocks. These funds buy small pieces of hundreds of companies' and then put them together and sell shares of the fund. When you buy one share of the fund, you are actually buying shares in many different companies.

This week, you get to choose how much you want to spend while you're here, and that amount goes into the first envelope. In the second envelope, put how much you want to take home and spend next week, or between now and the next time I see you. In the third envelope, I want you to decide how much you want to give away, and in the fourth envelope, how much you want to invest, but you won't get that money back until I see you next. At that time, you will decide whether to cash in, stay invested, or invest more.

Tomorrow, we'll discuss whether you want to choose individual stocks or ETFs to invest your money, and I'll share two companies where most of my money is invested: Vanguard and Dimensional."

After Grandpa Moneybags finished his lesson, the boys debated about how much to spend. Bobby suggested that he didn't need any money. He could go without laser tag and ice cream, while Keith warned him that he wouldn't be able to go kayaking at the lake, one of his favorite fall activities. After some discussion, they decided to keep $20 for savings, spend $20, give $10, and invest $50."

Grandpa Moneybags wrapped up the lesson with a promise and a warning. "I will set up those investment accounts for you with a $50 contribution each, but remember that it's a long-term investment. We'll monitor the investment's progress every week, but keep in mind, your odds of a positive return on any given day are just barely better than a coin toss (52%)." One thing to keep in mind. Never let money fool you into thinking it has the power to bring you happiness. Always remember, it is just a tool. Use it wisely."

Services offered through Hurlow Wealth Management Group, Inc., a Registered Investment Adviser. Hurlow Wealth Management Group, Inc. does not provide tax, legal or accounting advice. Advisory services are only offered to clients or prospective clients where Hurlow Wealth Management Group, Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Hurlow Wealth Management Group, Inc. unless a client service agreement is in place.