So, you are planning to provide your child with some financial assistance in the years to come, to give them a good education or to help them purchase their first car or buy their first home etc? The key here is to start saving early and buy good assets.
There are plenty of different assets that you can buy, e.g. cash, fixed interest investments, shares and property, however, for the purpose of this article, I wanted to concentrate on the first point and that is: start saving early. By starting now, you will be buying one of the most important and non-renewable assets of all, time.
Never underestimate the value of good old fashion saving and allowing the ‘magic’ of compound interest / returns over time to do the hard work for you.
When my wife was pregnant with our first child, naturally, like any good parent my mind raced towards how I was going to provide for this new life. However, I didn’t want to just provide for my child, I wanted to teach them about money, about investing.
“Teach a child in the way that he should go, and when he is old he will not depart from it”. – Proverbs 22:6.
Before the birth of our first child, I had a reoccurring image in my head – the one where the little child looks up at their dad and asks the question, “Dad, what does ____ mean?”
Like a child stacking blocks one on top of another, we naturally learn by building upon our prior knowledge, a reference point. Babies have no reference point. How was I going to explain something to someone who had no reference point?
Thankfully, it wasn’t has hard as I had imagined.
When our eldest daughter, Mia, was around 4 years old, she asked me the question, “Dad, what does investing mean?”
Investing: “to put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit”. – Oxford dictionary
Knowing that she was not going to understand the above definition of investing, I told her that, “it was when money makes money”.
Thinking back on this and chewing on those words again, it makes sense. The heart of investing is simply compound interest / returns, which is simply this: interest that is paid on interest i.e. money making money.
You don’t need much to get going. $5 invested on a weekly basis and earning just 4% pa, would be worth around $7,910 in 20 years’ time. $10 invested on weekly basis, earning the same rate of return, would be worth around $15,820 over the same period and $20 invested under the same scenario would be worth around $31,640.
Have a look at a simple compound interest calculator on ASIC’s MoneySmart website.
So, why not start today? To keep it simple, get started by:
- establishing a high interest paying online bank account, offered by all the major banks;
- directing a regular amount of money into this account via automatic direct debit, even if it’s just $5 per week; and
- Stick to it and be consistent!
By the way, a few days after I had told Mia about investing, to see if what I had told her had stuck, I decided to ask her “what does investing mean?” She thought for moment. After a brief pause I said, “I’ll give you a clue… it starts with iii….” She thought for a little longer and with a big smile on her face she answered, “IMPOSSIBLE!” Hmmm, it looks like I have more teaching to do…