As the playwright George Bernard Shaw put it, “Youth is wasted on the young,” but applying that to investing gives an opposite outcome. In reality, ‘youth’ is on your side when it comes to investing. Developing good money habits early in a child’s life is vital. It will position them for financial success throughout their personal journey. I recall growing up, having my “piggy bank,” and getting so excited when it was filled. It was such a joy collecting coins and paper money.
If you begin the saving habit when you are young, time and compounding will be your most important assets. You might ask why this is so. Compounding is the process of your money growing exponentially, or snowballing, over time.
Let’s consider this example: you put $1,000 into the stock market or any money market fund, assuming a 6% annual return. That means that the following year, it will be worth $1,060, the year after, $1,123.60, and the other year, $1,191.02. I think you get the picture. With compounding, you make money on the initial amount you put in, called the principal, and the interest or gains each year thereafter. Essentially, you’re earning gains on gains.
The benefits of compounding apply to the entire family. Start contributing $10 per day or $3,650 per year to your child’s university savings account when they are one (1) year old. Assuming a 6% annual return, by the time they’re 18, they would have $119,655 saved.
You can see that it doesn’t take much effort for your money to grow over time. Allowing children to be part of the process is key to building meaningful wealth.
Speak with any licensed financial advisor about finding an appropriate instrument that can yield a satisfactory rate of return based on the instrument’s performance over the years.
Parents, one of the easiest ways to begin educating children about money is to make it fun and look for teachable moments. For example, I play Monopoly with my girls and allow them to interchange roles of being the banker, paying rent, buying houses, etc. Other suggestions include opening a joint savings or a custodial account for your child. As soon as they fill up their “piggy bank,” they can carry funds to the bank and deposit same.
Additionally, set an allowance for your child by deciding on a reasonable amount your child will receive each month for completing specific tasks. This will teach them healthy wealth-building habits early on and incentivize them to work. You could even go a step further and empower them to negotiate a raise by taking on additional jobs or responsibilities.
By making this important aspect of their lives fun, not only will children enjoy learning about money, but they’ll also internalise these lessons, giving them a financial head start in life.