Many of us work hard in order to provide a comfortable life for our children. We also try and give them a head start in life by giving them the best education possible, and in some instances, paying through the nose for private tuition, piano lessons, etc. – instead of just giving them money or paying for tuition.
One of the best things you can do for your kids is to show them how money works: how to make money, how to manage it, and how to make it work for them. The best way to do this is to invest for them while they are young, slowly building a solid financial foundation for them to stand on. A lot of people are quick to dismiss this as indulgent behaviour guaranteed to turn out spoilt-rotten children who will sponge off their parents for the rest of their lives, but we urge you to think a little more broadly.
Making your child a millionaire is about ensuring your child is able to enter adulthood without serious financial worries, and with the advantages money can buy, and the kind of financial sense – instilled in them by you – that ensures a healthy relationship with their dollars and cents for a long time to come. Granted, with inflation and without guaranteed rates of growth, you may not reach a million dollars by the time your children become adults. No matter – by then, they’ll be finance-savvy savers and investors themselves, building on the foundation you began.
How to invest for your children
Stock market, stock market, stock market! Let’s assume a conservative return of 10% a year over the lifetime of your child. Take a look at what might happen if you invest just $250 each month on your child’s behalf, and what might happen if you leave it up to them to start on their own:
|Investing for your children|
|Child’s age||Invest $250 per month until 21 then stop||Start investing $1000 per month from age 21|
If you put $250 a month into a tracker fund that returns 10% until your child’s twenty-first, it would then be worth about $202,256. If you hand the fund over and it continues to accrue compound interest, then by the time they reach 60, a total outlay of $6,300 would be worth $8,321,778. However, if you invest $1,000 a month from age 21 to 60, you’d only end up with $5,074,515, despite having invested considerably more.
For simplicity, we’ve ignored the impact charges and inflation here, all of which would take a hefty chunk from these sums. But, even allowing for these, the basic message remains the same and that is the earlier you invest, the easier it is to build a significant pot of wealth.
The easiest way to teach your children about finance is to get them involved. Investing money on their behalf is a great place to start, but that’s just the beginning. Teach them how money invested sensibly will grow, and how that growth will create more growth via compounding interest. Show them how to save by opening a savings account for them, and get them to pay the money in themselves. You could even introduce the idea of buying shares in individual companies.
Happy saving, investing, and living.