As parents, it’s natural to want to give our kids every opportunity to help them succeed, and financial literacy can be a real game-changer! Teaching our tamariki how to put their money to work can help set them up for a lifetime of healthy financial habits.
You could start by encouraging them to manage their money by dividing their pocket money and small jobs earnings into four piles: for spending, saving, investing and giving away.
Money earmarked for spending can be used for activities like movies; money for giving away could support a school charity project. But the real lessons (and fun!) come when they learn the difference between saving and investing and realise how they could get their money working harder for them.
Saving money by putting it into a bank account or a term deposit is ideal for short-term goals. In comparison, investing money in the share markets is buying assets you think have potential to increase in value over the longer term. And with investing, you’re giving your kids the chance to grow their money!
The magic that makes a million
The magic of investing is in the snowball effect known as compounding growth. This is where your children’s money exponentially creates even more money.
On average, the US share markets have grown around 10 per cent each year since 1870. This means if you invested $2,040 when your child was born, and got average annual returns of 10 per cent every year, by the time your child is 65 that could grow into $1 million before inflation.
By comparison, $2,040 put in a savings account earning 1 per cent interest when your child was born would only grow to $3,906 over the same 65 year time period.
While kids aren’t famous for their patience, you could remind them that because they’re young, any money they invest now could build into a decent nest egg over time. While investing can be a bumpy ride, over the long term the highs outweigh the lows, and your kids have time on their side to ride out any ups and downs.
Invest in what they love
Introduce your children to the share markets by explaining what shares are – actual stakes in actual companies – and help them create a list of companies or industries that interest them.
Start with the companies with products or services they use or love – from space, technology, gaming, electric vehicles, climate change to food. Investing in innovative companies that excite them will likely keep them engaged.
Or inspire them to look for shares in an exchange traded fund (ETF). These are a basket of company shares they can buy in a single ETF purchase. They’re a simple, low-cost way to own hundreds of companies. World-famous investor Warren Buffett says the best thing most people can do is to own an S&P 500 index fund that spreads money across 500 of the biggest companies in the US.
There are few gifts we can give our children more valuable than financial know-how. Starting strong financial habits early through investing can pay off for the rest of their lives. The exciting part is you get to do it alongside them. Whether you’re brushing up your skills or learning beside them, it’s never been easier!
Head to Hatch kids to find out more.
