Top 5 Investing Tips For Kids
22 June 2022
We all want to help our children get the most out of life, including with their finances. It is often touted that it is time in market not timing the market that is key to successful investing. So with that in mind here are some tips that can not only give children a jump start on their future financial success but also they could also learn a few key lessons along the way.
As an added bonus, these tips can also be applied to new investors at any stage of their life. So, without further ado, let’s get started!
1. Embrace the value of time
Kids have what adults crave – more time. From an investing perspective, this has major significance. You see, the more time you have, the more you can take advantage of compounding.
Compounding is the exponential effect of earning interest or dividends on your capital. You achieve this by ensuring your investment firstly earns interest or dividends, secondly, by reinvesting these earnings and finally, waiting and letting compounding take effect.
For example, if you start with $1,000 and earn 6% interest every year, after the first year you will have earned $60. If you keep that $60 in the account, your invested capital becomes $1,060, up from $1,000. After the second year, you will have earned $64 on that $1,060, rather than $60 on $1,000. As you can see through reinvesting your earnings, the interest grows exponentially each year, so much so that after 20 years invested your initial $1000 will have grown to $3207!
This simple example illustrates the power of compounding and embracing this phenomenon is a top tip for kids just starting out investing.
2. Start small if you like, but make sure you start!
A lot of trading platforms require minimum initial investments of around $500-$1000. This might be either out of reach for young kids, or too much exposure at a time.
That doesn’t mean that kids can’t, with their parents’ help, start investing and become sound investors over time. There are a range of platforms around that have made it easier for new investors to gain exposure to financial markets with much lower capital amounts. These simple, online, platforms allow parents and guardians to invest on behalf of their kids from as little as $10 and celebrate with them as they learn the ropes of investing and reach milestones towards their goals.
By dipping their toes in with small amounts, this limits their exposure as they experience and learn about investing. Once they become more comfortable and gain confidence, the capital they invest can be increased.
Looping back to the first tip, a key point is that, even though you may only have $10 to invest on a regular basis, it is important to start. Like smart people say, any journey starts with a single step. Don’t put off starting!
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3. Keep it simple
Investing doesn’t need to be complicated. Across Australia and the world, there are a lot of large, well-known companies with simple business models. A lot of people have done extremely well by investing in these companies over a long period of time.
Although it may be difficult to choose which company to invest in, there are a few simple ways you can spread your investment across several companies from one trade. These include investing in managed funds or exchange-traded funds (ETFs).
By investing in several companies at once, these types of funds offer low fees and diversification – helping to reduce the risk of your capital losing significant value if one individual stock goes down.
There are ETFs that provide investors with broad exposure to many companies listed on US stock exchanges, including tech giants such as Apple, Facebook, and Google. Over the previous 20 years this particular index has risen more than 230%, a testament to the phrase ‘time in the market beats timing the market’.
4. Set and stick to a budget, and remain disciplined with goals
Setting a budget means having a plan and knowing how much money is coming in and going out. For a child this might mean receiving $20 per week in pocket money and deciding to allocate a quarter of this to save for investments.
Doing this however is not easy and requires discipline. Money given at birthdays, Christmas and other special occasions should form part of this budget, and as children become engaged with growing their investment portfolio, they may be inclined to invest spare funds when they have them.
Another advantage of investing their pocket money is that they might see that the more pocket money they earn, the more their investments can grow – i.e., hard, smart, work means more money.
Finally, having clear and realistic goals is another great way to stay motivated throughout your investing journey. These goals could range from saving for a child’s first mountain bike to paying for their future house deposit.
5. Talk to kids about investing and keep them informed and engaged
Although investing may seem mostly about wealth creation, a good long-term investor will necessarily learn about broader subjects and disciplines.
Many factors influence a company’s profitability. These include the domestic and international economy, domestic and international politics, the price of commodities, inflation, population growth, specific market factors, governance issues and the weather.
By talking to the kids in your life about the companies they are invested in, and why some are doing better than others, you may engage them to think about these issues. Particularly, you may find them start to think creatively about why or how a particular company may perform given a set of circumstances.
This engagement with the broader economy and the world may lead them to pursue education and work opportunities they may otherwise would not have done but for starting their investing journey early.
It’s not just about making money
Children stand to benefit most from the activity of investing, as the lessons learnt here will help them develop patience, discipline, and responsibility as they become adults.
By following these tips, kids will not only get a jump start on their future financial success, but also learn a few key life lessons.
Although the road may appear long, and goals difficult to see right now, take advantage of the time ahead of them and start the kids in your life on a long-term investment journey. One day they’ll thank you.
Cover image source: Bychykhin Olexandr /Shutterstock.com
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