Helping Your Kids Get into Investing Early
In this Internet-dominated, economy-fearing age it may be possible that your kids will out-know you in terms of stocks and trading before they finish grade school. American author Katherine R. Bateman suggests in her book, The Young Investor: Projects and Activities for Making Your Money Grow that no age is too young to get kids making sense of their dollars.
She suggests that even in delivery babies are buying currency – that is, the effort they exert coming into the world is generally awarded with monetary gifts. Bateman says that rather than encouraging your children to begin saving in piggy banks, go one step further and have them deposit into real bank accounts as soon as they can, or open an account for them as soon as they are born. In doing so, not only are you teaching them how to save up for desired items, you are also teaching them how money can grow via interest.
Bateman suggests that when your child is able they should have their own chequing account and begin writing cheques with student ID or making withdrawals with a debit card. This will spare them the chance of loosing cash on route to make a purchase, and give them a method of tracking their spending in a cheque book or bank statement. By keeping record of every purchase and deposit they make into their account, the goal is that they will begin learning how to budget. Thus, when it comes time to getting a credit card, they will know how to track their savings and limit their spending in accordance with the funds they actually have liquid and available.
Bateman reminds youth and parents that it is essential children are taught how credit works, how overdraft works, and the fees associated with borrowing funds one does not tangibly have. In addition, she emphasizes to readers the difference between simple interest and compounded interest.
Simple interest, simply means, interest that accumulates annually. A savings account that generates 4 per cent interest, or adversely an account that charges 4 per cent interest on an overdraft say, will tabulate that interest on the basis of the balance annually. Thus a savings account with a $100 balance would generate $4 per year and an overdraft of $100 would charge $4 per year if interest was calculated simply.
Compounded interest, however, calculates an annual rate, such as 4 per cent, monthly, or as a division of 12. To determine what this means in numbers, convert the interest percentage into a decimal (in this case 4 per cent converts into 0.04) and divide by 12 (0.003). Thus a savings account holding $100 would generate $0.33 the first month and 0.33 per cent of $100.33 the next month and so on.
In an account’s infancy this difference in interest accrual might not add up to much, but over time compounded interest will make a huge difference to those accumulating sums.
Bateman posits that – with the help of family – if a child is able to save $8,000 per year between the ages of 7 and 21 and those funds are placed in an account with the ability to generate an average of 4.5 per cent monthly compounded interest per year, that account will grow to the sizable sum of $1,153,286 by the time the child hits the age of 65 and is ready to retire.
Albeit those number are pretty idealistic for the average family but, more modestly, if a family was able to help a child save $2,000 per year from birth to age 25 in a Tax Free Savings Account (TFSA) that could generate 2.5 per cent in interest compounded monthly, by the age of 25 that child could feasibly purchase his or her first home or condo with about $75,000 toward down payment.
Compounded interest should also be illustrated in terms of credit. On a credit card carrying a balance of $10,000 with a monthly compounded interest rate of 19 per cent, the credit holder will be paying 0.0158 per cent (0.19/12) on their balance every month. That’s $158 the first month alone.
What Type of Investments are best for your Children?
Bateman suggests that young investors establish the level of investment risk they are willing to take on by drawing up a risk tolerance chart in which the child writes down their name in addition to those of 10 close family members or friends. Next to the names the child will indicate whether that person does not take chances, sometimes take chances, or loves to take chances. This doesn’t need to be about money- the child may rate their relations based on sports the person likes to play, their willingness to answer questions in class, or the speed at which they ride their bike.
Depending on how the child rates themselves, as well as those whom he or she looks up to, there are a variety of investment options available to them. Children that identify themselves as not liking to take chances may wish to begin their investment careers with a locked-in Guaranteed Income Certificate (GIC) or Canada Savings Bond, while daredevil children may want to locate a stock report online and be aided in purchasing their first stocks (most likely through their parents’ stock accounts; which means if you haven’t you will need open one). Meanwhile children residing in the mid-range risk bracket may wish to deposit savings into a medium-risk mutual fund.
Regardless of where your child stands on the risk spectrum, they should never be underestimated in their capacity for learning about how money and markets work, and how they can start early in investing toward their future. Keep tuned for more information on learning how to read stock tables and purchasing your first stock option; and whether or not your child is ready for online banking and transacting.