How to invest for your children’s financial future

I have a strong belief that all children ought to be exposed to the basic principles of investment from a young age, and hopefully this will allow them the opportunity to develop their own sense of financial literacy by the time they reach early adulthood.

In 2015, the University of Sydney Business School (USBS) stated that poor financial literacy results in a higher risk that Australians will make the wrong decisions in matters important to their future financial well-being, such as superannuation investments (not to mention credit cards, personal loans, and investing directly in the share market).

Professor Susan Thorp of the USBS states:

People are dealing with increasingly complex decisions sometimes involving very large sums of money without understanding the basics, such as compound interest … by any objective measure, many lack vital financial skills.

Then last week, for the first time, I came across the concept of the ‘kidult’, 18 to 27 year olds who have a job, but are living at home with their parents and spend all of their income on ‘having a good time’.

These days it’s increasingly difficult to save for a deposit on a house for anyone under the age of 30, so staying with mum and dad for this time is a smart thing to do on the proviso that a decent proportion of the person’s take-home pay is actually saved.

If you’re a parent with young kids, and you want them to avoid ending up like the 22-year-old woman owning 25 pairs of shoes and owing $25,000, or the early-30s man with $50,000 in credit-card debt, here’s something that you can do today: set up a long-term savings plan (yes, it’s another hit to the family budget, but one well worth following through with as I’ll demonstrate below).

A savings plan can be done via any good equities-focused managed fund, or alternatively, by saving the money in a separate cash account with the objective of buying shares, say, every 12 months.

Starting with $1,000 and $100 per month, investing over 18 years, and assuming an average annual rate of growth of 7%, you could end up with $46,836. Increase the investment period though by another five years at 7% per annum, and your kids will have a gross amount of $73,597.

What would that do for your kids’ sense of independence and their outlook on the future?

Naturally, the assumed rate won’t be earnt in a straight-line. There’ll be years both good and bad, but you should at expect at least 7% on average. There’s also brokerage and taxes to pay along the way, but notwithstanding these, the benefits are clear: invest now and invest regularly over an extended time period and you’ll find that the equity-risk premium eventually makes its presence felt on your investment.

A couple of excellent starter-stocks to be considered for a growing portfolio include Magellgef TMF Units (ASX: MGE), the listed version of the Magellan Global Equities managed fund, and WAM Capital Limited (ASX: WAM) which provides investors with an exposure to an actively managed diversified portfolio of undervalued Australian companies.

As your portfolio grows over time, you can then add to your kids’ portfolio by buying shares in solid businesses with good growth prospects like Ramsay Health Care Limited (ASX: RHC), Seek Limited (ASX: SEK), and Altium Limited (ASX: ALU).

Foolish takeaway

Over time, in addition to the clear financial benefits of investing early, regularly and over an extended time horizon, your kids will also learn a lot about investment, business, and the economy in general.

As they grow their knowledge of the underlying investments you have carefully made for them over the years, they’ll hopefully become confident and informed investors in their own right leading to a much better appreciation of what money can do for themselves if it’s spent or allocated wisely.

Certainly this prospect is much better than starting their adult lives with a fantastic collection of shoes, an unserviceable debt and a delayed start to adulthood.

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Motley Fool contributor Edward Vesely owns shares of Ramsay Health Care Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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