One of the best things we can do for our children is to show them how money works.
When it comes to investing, there’s growing evidence that our attitude to money and how we prepare for our financial future is governed by what we were taught from an early age.
According to research by Cambridge University for the Money Advice Service, our financial habits are formed by the age of seven. By this age, most children in the UK are capable of complex functions such as planning ahead, delaying a decision until later, and understanding that some choices are irreversible. Although learning about money is now part of the national curriculum for secondary schools in England, it isn’t specifically included in junior school lessons. However, there are many ways of gently introducing younger children to the world of finance and teaching them the principles of good investment.
Teaching children to save money
Junior Individual Savings Accounts (JISAs) are a good way for children to learn about the value of saving money for the future.
The advantage of a JISA is that they are tax-free, and once the account has been opened by the parent or guardian, anyone can make contributions, including grandparents, friends and family. The savings limit for the current tax year is £4,368. Children gain control of their JISA at age 16, but the money cannot be withdrawn until the child is 18. At that point, the account is automatically rolled over into an adult ISA, a valuable facility for those who want to continue saving or investing tax-efficiently.
Saving and investing
Children who have learned to save are then ready to grasp the difference between saving and investing. Investing money on their behalf is a great place to start, and will help them understand how money invested wisely will grow, and, thanks to what Einstein referred to as the “8th Wonder of the World”, compound interest, growth gets added to growth. You can make this more relatable to kids by explaining the “Rule of 72”. This rule tells you how long it will take to double your money at a given rate of return. So, if your money is earning 3 per cent a year, then 72 divided by 3 means your money will double in 24 years.
Starting early allows a child to witness investment growth first-hand and to experience the common ups and downs inherent in the stock market. Understanding that volatility is a normal occurrence, and learning to invest through it, will be a useful lesson to learn and apply in later life.
Understanding the amount of risk involved in different types of investment and how a diversified portfolio can help smooth out returns will help them make the right decisions about their money in future years. Explaining how funds like unit trusts and investment funds work, and how they can provide a spread of investments that are professionally managed can be a good starting point for younger investors.
If you would like to help your children learn to invest and would like some advice on choosing the right funds, then do get in touch.