Want to give your kids a financial head start without simply handing them cash? Teaching them about money and investing in the ASX could be a gift that keeps compounding.
The best part is that you don't need to be rich to get started. A little money, plenty of time and some financial education could potentially give your children a serious advantage.
Image source: Getty Images
Start early for serious compounding
The first money move is also the simplest: start early.
Compound returns can be a remarkably powerful force when given enough time. For example, investing $200 a month from a child's birth and earning an average annual return of 8% could produce roughly $95,000 by age 18.
That's despite total contributions of less than $47,000. The difference comes from compounding.
Parents looking for a simple approach could consider low-cost ETFs such as the Vanguard MSCI Index International Shares ETF (ASX: VGS) or Vanguard Australian Shares High Yield ETF (ASX: VHY). These can provide exposure to a range of companies without requiring parents or children to identify the next hot stock.
Of course, investing on behalf of a child comes with tax and ownership considerations, so it's worth understanding the rules before getting started.
The bigger lesson? Time in the market could matter far more than trying to pick tomorrow's superstar stock.
Teach them to invest
Saving is great. But if you're teaching your kids about money, stopping at the piggy bank is leaving out half the lesson.
As children get older, explain why businesses make money, what shares actually represent, why prices move and how dividends work.
Even better, let them follow ASX companies they know. If they use a particular product or service, ask them whether they'd want to own part of the business.
The goal isn't to turn an eight-year-old into Warren Buffett. It's to make investing feel understandable rather than intimidating.
A child who learns the basics of long-term investing early could carry those habits into adulthood, potentially becoming a much more confident investor.
Invest in their earning power
Here's the plot twist: the best investment for your child might not be an ASX portfolio at all.
Education, skills and experience can potentially generate returns for decades.
That could mean tutoring, coding lessons, music classes or helping fund university. Developing skills that increase future earning potential could ultimately give your child more money to save and invest themselves.
And that's a pretty powerful compounding loop.
Foolish takeaway
Parents don't need a fortune to give their kids a financial head start.
Starting an ASX portfolio early, teaching children how investing works and helping them build valuable skills could potentially be far more powerful than simply giving them money.
The greatest inheritance might not be a share and ETF portfolio. It could be teaching them how to build one.
