Children & Money: Teaching your child about money - Part II

 

Winston Churchill once said, 'saving is a very fine thing. Especially when your parents have done it for you,' When I ask parents if they are saving for their children, they often respond -”I can barely put anything aside for myself not to talk of saving for my children!” Yet this could be a huge opportunity lost as saving for children, comes with the advantage of time. The earliest gifts have time to grow and they can benefit from the magic of compound interest. To Invest in a child's economic wellbeing is one of the most fulfilling actions a parent can take.

Savings Accounts

The traditional Naming Ceremony, for many Nigerian families presents a good opportunity to jumpstart the saving scheme for a child, so try not to spend all the money you receive! Children often receive token cash gifts during family visits, for birthdays and at Christmas; if they take just a small portion of this and add it to their savings it will be a good place to start.

Most banks offer special savings accounts for children. These are ideal for the smaller cash gifts that are a child’s first savings. These accounts usually offer interesting features aimed at children of up to 18 years, and often attract their attention through targeted adverts and may even offer bonuses or gifts on joining. It is important to fully understand the features in the account you choose so that they meet with your requirements.

My son, an avid Manchester United fan, had a Manchester United Savings Account where he earned an extra 1% interest when his team topped the league. In his early years, it was a great way to keep him interested in saving. Although such incentives are a great way for making saving more exciting for children, your key concern should be the best interest rate and investment performance whilst ensuring that the funds are placed in a stable, strong institution.

Features of savings accounts:
Because children aren’t expected to have vast amounts of money to save, most savings accounts can be opened with small amounts, sometimes as little as N1,000. To help encourage them to save, children’s accounts tend to attract higher interest rates than standard savings accounts with rates of up to 5% per annum offered.
Some savings accounts have restrictions as to the frequency or amount of withdrawals.  If this amount is exceeded there could be a dramatic drop in the interest paid. Some accounts provide instant access, whilst others may require notice to be given to make withdrawals. Many accounts come with an ATM card which is particularly useful for older children, as their ability to physically withdraw money themselves when they need to, makes for a very vivid lesson in money management.

Cash or Stocks?

After your recent experience in the stockmarket, you might be thinking that investing your child’s savings in the stock market is too risky. Many overcautious parents miss out on getting the best out of their children’s money. There is no such thing as an entirely safe savings or investment vehicle – so it is important that you understand the risks that you are taking.

Whilst it is true that money market accounts are a good first step and provide, security, easy access and a guaranteed return, keeping all your savings in cash does involve some risk; the effects of inflation mean that even the best accounts fail to keep pace with inflation. Whilst your eye is on interest rates, the investment is likely to be eroded by inflation; savings accounts are ideal for the everyday, short term savings but don’t lose sight of the prospect of greater growth that the stockmarket can bring; it is generally regarded as the best option for saving for the long-term; market risk is clearly a risk worth taking as there is time to ride out any short-term volatility.

Mutual funds offer diversification by pooling together investors’ funds to invest in a wide range of stocks and are a popular way of investing for children. If your plan is to put money away for your child for a long time, say, five to ten years, then it is well worth considering investing in an equity fund. Although children cannot hold mutual funds in their own name until they reach the age of 18, an adult can open the “account” and add the child's name to the account holder name. The adult can then sign on behalf of the child until they come of age.

The benefit of saving regularly

The concept of cost averaging helps with regular investing for children. To mitigate some of the risk of investing in the stock market one can make regular investments instead of putting money away in one lump sum. By drip-feeding money into the market and investing the same amount on a regular basis, say monthly, every quarter or annually on your child’s birthday, fewer shares or units will be bought when prices are high and more when prices are low; this reduces your overall average cost and means that you don’t risk investing a lump sum when shares are overpriced and then lose out when market prices fall.

Lets imagine a parent invested a sum of N100,000 in an equity fund on the birth of their child on 1 November 1999. Lets also imagine they had the knowledge, foresight and ability to continue to invest the same sum of N100,000 on each birthday each year. By Dele’s tenth birthday on 1 November 2009, the investment could have been worth about N                an by his 1tenth birthday it would have been worth……... Even though this example doesn’t take inflation or exchange rate fluctuations into account, it does graphically portray the magic of compound returns over the long term and what a wonderful gift this could be.

When Do I Start?

Unfortunately children get very little personal financial guidance in school and most don't learn significant lessons until they're adults and only as a direct result of their own real life successes and failures. Before you know it, bad habits can develop that can last a lifetime and any problems can be both costly and emotionally charged as parents resent having to constantly bail their teenagers and young adults out of financial troubles.
  source:moneymatterswithnimi.com