How I Help My Daughter Invest
Every week I receive one or two emails specifically asking about how to help children invest and there are often comments on various social media about whether you even should help your kids and if you do, whether you should tell them about it.
From what I’ve noticed, the instinct to start saving for your kids seems to kick in pretty early with instinct telling us that every dollar we can tuck away will help this new little human we have created in the future. An early start on investing feels like the right thing to do for many (compound interest and all that) even if their own finances might be in a bit of a muddle, you feel the need to get it right for your kids.
I was no exception to this and I think I’ve mentioned before that one of my first trips out of the house with my new baby was to post a letter signing her up to her first investment (fear not, it can all be done online now so you need never even leave the house in the first few weeks. Phew!)
That little tiny bundle of joy is now 11, not taller than me yet, but some of her friends are so it’s only a matter of time! And over these years we’ve evolved an investment methodology that appears to be working so I thought I would share with you what we do in our own whare and that might give you some tips for what you can do in your own household.
When she was born we signed her up to KiwiSaver and more recently we switched her to Simplicity Growth. We contribute $40 a month to her fund by way of a voluntary automatic payment. Our expectation is that as she begins to work she will take over these contributions in full, either as deductions from her own wages or voluntarily if she is self-employed. She will keep building this up for her own retirement (currently at 65 years) NOT for a house deposit. I’ve checked the compound interest calculators and just this simple investment will see her extremely comfortable in her own retirement.
When she was about six I opened a sub-account off our own bank account and started depositing $10 a week. This account is used for school fees, school camps, sports subs, new shoes etc and the balance rises and falls depending on what expenses there are. This money is earmarked just for her expenses and really allows me to budget for the myriad of things that come up. We have had a particularly spendy start to 2019, hopefully, things will settle down...
When she was about nine, I signed her up to SmartShares NZ Top 50 Fund (FNZ) where we automatically contribute $50 a month on her behalf. This money will most likely be used for tertiary education, it just depends on what she wants to do really. Or maybe she might start a business, maybe it might go towards a house deposit? Will this pay for her first car? Who knows, there are many options but this investment is growing really strongly and we can cash it in at any time. Investing in the share market is a long term strategy and I don’t envisage her needing any of this until she is about 18 years old.
When she was ten I opened her up a Sharesies account which I put $5 a week into and now on a Monday I call her over to the computer and let her invest this money in the US500 index fund. This is a double up really, I could have just stayed with the SmartShares account and I only really ever started this account so I could blog about it if I’m completely honest but this has become a really good learning exercise for her because she actually gets to interact with her own investment and their simple format shows her simple math about how her fund is performing.
Once a week, if she has done the jobs on her list, she gets $11 pocket money. She must invest at least 50% of this, the rest she can spend and share in any way she likes. If she receives any extra money from doing jobs, selling things that she has created, from birthdays or Christmas then 50% of this gets invested into her Sharesies account.
So, if you have done the math, each month we invest $161 on her behalf.
And the point that I think is crucial is that she knows all about it. She does not fully understand it by any stretch of the imagination (she’s only 11!) but she knows that I am managing her money until she can do it herself one day. And she is learning the connection between work and money and also all about compound interest because she gets to see her Sharesies account, for example, growing ABOVE the amount that she has actually put in there and it’s teaching her that if you can go without when you receive $10, by investing half of it, then in the long run that forfeited $5 is going to keep working and earning for you.
I’m not teaching her to ‘save up’ money for something, so she can blow the lot, which is what most adults do. I’m teaching her to ‘invest’ and that if she puts enough aside, it will, in turn, generate its own money; I am teaching her to be an investor, not a saver and I think there is an important distinction there. And I’m also teaching her that if she has set aside half of what she earns then she can spend the remainder with freedom and enjoyment with no sense of guilt. The point of money, after all, is to be spent right?
And my reasoning for telling her everything is that by the age of 21 she will have about $60,000 in her investments, a sizeable sum (this is conservative and does not take into account the fact she will have a part-time job etc). If I drop this on her at the age of 21 she has no back story, no understanding that for the last 21 years Jonny and I went without each week to provide for her. Do you know how the story goes that most Lotto winners end up back where they started? In my mind, it's the same thing. Easy come, easy go!
We repeatedly hear that in New Zealand many are financially illiterate, and I know it to be true from writing a blog about money, that people do not speak to each other about money. So, why would I secretly build up a stash and hand it over at the age of 21? I think that many people feel that this would be a “moment” for both them and their child but I could see many ways that it could backfire because the parent has had all this time to dream up a wonderful “ta-dah here is a heap of money” scenario and the child just thinks they won Lotto and may spend it as such. In my mind, I’ve got 21 years to tell her all about it and to take every opportunity to educate her about how to use money BEFORE she leaves our home and never listens to a word her parents say again...
Have you ever received a lump sum of money? Where is it now, what did you do with it? I watched a family of four I know who received an inheritance from a parent who had diligently gone without so he could leave money to his children. They bought a new car and a jet ski. And they still have a mortgage.
Feck that. I’m not providing for my child so she can blow it on a new car and a freaking jet ski!
Their poor old dear departed Dad had gone without himself and saved and invested wisely and was clearly good at managing money, but he failed to teach his kids to do the same and they blew the lot.
I’m going to use every opportunity I can to teach her how money works. At the start of the year her teacher told her that school camp was coming up and the cost was going to be $265 and she knew that this was a decent amount of money for us to spend on her, but I was able to remind her that each week we put money aside for such things and it was already covered and budgeted for so she didn’t need to worry about a thing (plus she had also helped sell raffle tickets to offset this cost too).
And you know how kids love to buy STUFF that as a parent I'm loathed to spend any money on? Well, because she saves half of every dollar she receives, any money she has set aside for spending she can go ahead and spend any way she chooses. Over time she has already gained a feeling of how much money is coming in ($11 a week) and how much she has invested ($5.50), how much she has left and therefore how long her spending stash takes to build up. And she makes far better decisions on what to do with it now. Plus, she ENJOYS spending it because she knows she has her other investments covered, which shuts her Mum up ;-)
Another benefit is that she is learning how to earn money of her own and the bit I love is that when she is saving up for something, the latest thing was a Lava lamp which cost $20, she knows she has to earn $40 if she wants to get it - because her very mean Mum makes her invest half of what she makes! And she is becoming a little entrepreneurial too, especially since she has learned to sew scrunchies which she is selling to her friends at $2 a pop.
Finally, teaching my daughter to be good with money is a slow burn. I don’t sit her down and give her a lesson, that would drive me mad as much as it would her, instead I show her by doing and I tell her what is going on.
And just so you know, my parents didn’t have the means nor the financial education to give me a head start and while I don’t regret the winding path that got me to this point I just REALLY REALLY wish someone had sat me down very early in life and explained how to be good with money because I now know that it takes such a very long time to catch up the time I lost.