How to talk to kids about investing
As adults, many of us are still discovering new ways to make the most of our money. If we share some of these lessons with our children, so much the better. Maybe they won’t the same mistakes we may have.
In my experience, children tend to be very interested in money matters. The earliest direct experiences handling money usually involve receiving pocket money in return for a few age appropriate chores. Pocket money can be useful to teach youngsters that money needs to be earned, and parents who back it up by opening a bank account for their child can provide practical lessons in the use of a debit card or how to grow savings.
But we can go further. Helping children develop healthy money habits isn’t just about encouraging them to save part of their pocket money (though this is an important lesson). Children have a real advantage when it comes to investing – time is on their side. That means kids have a powerful opportunity to make the most of compounding returns especially when they invest in growth assets like shares.
Explaining how shares work to children is pretty straightforward. Shares give you a slice of ownership in a big company, and as an owner you’re entitled to receive some of the company’s profits in the form of dividends. Easy.
It can help to talk to children about shares in well-known companies that kids will be familiar with like say, the major supermarkets or the big banks.
It turns out plenty of Aussie kids are already getting into sharemarket investing. Finder’s 2021 Parenting Report shows that close to one in ten under-12s have a share trading account.
When it comes to investing, children won’t always have enough money to build a diverse portfolio of shares. That’s where exchange traded funds (ETFs) can help, giving youngsters access to a broad basket of shares for as little as $500 plus brokerage.
While minors can’t trade shares or ETFs themselves, parents or grandparents can open an online trading account with an adult acting as trustee for the child. It’s an option offered by a number of online brokers. What’s great about this approach is that when your child reaches age 18, the shares or ETFs can normally be transferred into an account in their own name without triggering a capital gains tax liability.
InvestSMART's Professionally Managed Accounts give parents the ability to invest on behalf of their children.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.