I hope you are saving for your kids! By saving for your kids, you are laying the foundations to help them become Financial Superheroes! Good for you. Now you need to make sure you are saving in the best possible way.
Many parents set up a bank or savings account for their kids. Whilst this is a good start, to train your kids to become Financial Superheroes consider investing for them. Here are three reasons why:
More money (probably)
A bank account could make your kids poorer
Your kids get to learn a new life skill that's not taught in most schools
The importance of the ‘I’ word!
I don’t want you to be put off by the word “investing”. I appreciate a lot of people hear that word and instantly think “complex”, “hard work” and “risky”. The truth is that investing is actually simple, and boring and an investment account is easy to look after. In terms of investing being risky, over the period until your kids become adults (I’m assuming that is many years from now) then actually holding money in the bank could be riskier than investing. I’ll explain more about this later in this blog.
When I say investing, I mean opening up a simple investment account, selecting a fund and putting a bit of money into that fund each month. Then leaving it alone. No “buy, buy, buy”. No “sell, sell, sell”. No picking winners and losers. No reading the Financial Times every morning. No looking at graphs and balance sheets. Just investing in the entire stock market and leaving it alone for a long time. Simple. I provide a link, later on, to help more on the 'how' to invest, the focus here is on 'why' to invest.
Three reasons of why you should be investing for your kids:
1. More money (probably)
The stock market over the long term has generated a return of about 7% per year, which is around 4% more than most savings accounts can provide.
To put that in context, if you save £20 per month for your kids from birth to 18 years old, you would have given them £4,320 over that period. If you put that in a bank account getting around 3% per year (only available in limited cases!) then at 18 they would have £5,700. If that money was invested then it could be £8,400 when they are 18 (based on 7% per year return). That’s £2,700 more via investing versus money in a bank account and almost doubling the amount you put in.
Granted the return from investing is unknown and it could be a lot lower than it has been in the past. However, in the history of the stock market the average return has never been negative over a full 15-year period (this is not to say it couldn't happen in the future but a world where companies haven't grown for 15 years means we'll have a lot more to worry about than our kids savings). Therefore, the potential upside is expected to be greater than the downside over the long term compared to putting money in the bank. Don’t get me wrong, over the short term the stock market can fall significantly. The key is to teach your kids that it is about the long term and that short-term falls in value only hurt if you sell when the market falls. Your kids don’t need to sell as they are holding their investments until they become an adult.
So, help them have a larger pool of money by investing for them today.
2. A bank account could make your kids poorer
The chances of losing the money you put into a bank account are very slim. However, there is a risk that by putting your money in the bank you become poorer. This is because each year the cost of goods increases by inflation. In the UK this has been around 3.1% per year on average *. So, if the money in your bank doesn’t increase by at least that amount, it means you can buy less stuff than before and hence you are in fact poorer.
That’s why investing is so important. It helps increase the chances of money growing at a faster rate than inflation and reduces the risk of becoming poorer.
Teaching kids about inflation is an important lesson. One of the evil villains in my free ebook “How to Train Your Kids to Become Financial Superheroes” is “The Inflator” and they will come to understand they need to use the “Growth Ray (investing) Superpower” to beat him.
3. Your kids get to learn a new life skill that's not taught in most schools
Your kids will get to witness and learn about investing as they grow up - a skill which will benefit them for their entire life. I wish I had been investing since I was a kid!
By investing for your kids, they will get to learn that the people who worry less about money are not the ones that earn the most amount of money from their jobs. It is the ones that invest what they earn that worry less about money.
If you look at the richest people in the world, most of their money comes from their investments, not their jobs. As they have these investments making them money, they don’t have to worry as much about losing their jobs or taking time off to spend more time with their families.
By investing for your kids now you will be instilling a key life lesson that is missed by many adults today. They will see firsthand that money can grow like trees if planted (invested) and they will have a forest, which will continue to grow when they become an adult. Given most young adults today don’t have a single tree, let alone a forest, your kids will have a massive advantage in life.
As Robert Kiyosaki, author of the book Rich Dad Poor Dad says, “Each dollar in my asset column (invested) is a great employee, working hard to make more employees and to buy the boss (me) a new Ferrari”.
[Personally, I'd change the quote to say that "each dollar provides me more choice, freedom and opportunity" rather than "buys me a new Ferrari" but you get the point.]
There you have it, now make investing for your kids a priority for the start of 2020!
I appreciate that a lot of parents worry about the risks of investing due to the headlines they read. I have written a blog on why these headlines should not worry parents who are investing for the long term. The blog can be found here.
You can either set up an investment account for each kid or simply set up one account for yourself and share it with your kids.
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Thanks for reading!
* UK Office for National Statistics (ONS) - Consumer Price Index (CPI) from 1989 to 2019