Managing money from small beginnings

How can parents help their children grow into the investing habit? SUSANNA STUART has some suggestions.

The best way to encourage savings is to require your kids to put a percentage of their pocket money into a savings account or piggy bank.

Set this as an iron-clad rule, but don't forget to take into account any goals your child may be shooting for - the purchase they have set their heart on. You will have to be firm about saving because children are unlikely to be paragons of thrift if left to their own devices.

As many parents find out, kids would rather not save. Some parents have found that they can encourage their kids by awarding a bonus if they reach a savings goal.

One parent I spoke to told her children that if they saved up to $100, she would top up their account by the same amount. She found this approach successful, although next time, she says, she might be a little less generous.

The savings habit varies from child to child, reinforcing the notion that a child's personality has a profound influence on what they do with money.

The basic and successful strategy is to set an agreed savings target. Get your child focused on a significant item. Out of the money your kids receive, whether it is pocket money or birthday money, encourage them to put at least 10 per cent aside as savings towards the goal.

Young children can start with a piggy bank or a jar decorated with magazine pictures of their favourite things. Once they reach 8 or 9 years old, you can open a savings account for them and transfer some of the piggy bank money that has been amassed.

Use a bank that offers a service targeted to kids. The National Bank, for example, has a School Plus bank account which doesn't have account fees and earns interest on every dollar. Kiwibank also offers suitable accounts for children.

Setting up regular payments into a bank account is a good way to demonstrate to kids the value of savings. They can see their bank balance growing and that it earns "passive income" through interest payments. A savings account actually teaches kids about three things that make money grow:

* The rate of interest the bank pays on your savings.

* The length of time you leave your money in your account to earn interest.

* The compounding effect of keeping the interest payments in the account, which will in turn earn interest.

It is surprising how many adults do not know about compounding earnings or interest. A quick way to calculate how long it will take your money to double when you compound the interest is by dividing the interest rate into 72. This is known as the "rule of 72".

For example, if you have $1000 earning 6 per cent, it will take 12 years for your money to double to $2000.

To work out how your savings will grow there are a number of calculators on the web you can use. Try the ones at www.sorted.org.nz - they also offer further information on how compound interest works.

One parent from a focus group I conducted in researching my recent book offered the following advice: "One of the most important things for children to learn is the effect of compound interest on their savings and the vital importance of starting a disciplined savings plan early in life." I cannot agree more.

Regardless of their age, many parents I interviewed feel that saving is not enough.

This sentiment was beautifully encapsulated by one parent: "Investing money would have given me an enlarged horizon and some sense of potential, of possibility for the future. I studied maps as a child but did not have any sense of personal power beyond what could be earned in a weekly pay packet.

"The world was exciting but I had no real part in it beyond that of being a holiday traveller with modest means."

Parents in the 60-plus age group tend to be familiar with saving and are very good at saving for purchases. But most wish they had progressed from there and learned to invest their money. Obviously for some investing was not possible, given hard times and the lack of discretionary savings.

In my opinion, many people don't invest simply because they don't know enough about it. You won't be teaching your kids about investing if you don't have the knowledge yourself. Either our parents weren't investors, or they didn't communicate this aspect of their financial lives to us.


In the 2001 Parents, Children and Money Survey in the United States, only 40 per cent of parents with children aged 11 to 17 taught their children about different kinds of investments.

I'm surprised the percentage is even that high, although in the US, it is fair to say, there is more of a focus on money and self-reliance than there is here. In similar studies on investment by New Zealanders it is still common for people to believe that "the state will provide".

Despite the different attitudes to money, when the US parents were asked where they would advise their children to invest $5000 to save for a long-term goal, their responses suggest many lack basic financial knowledge.

Half of the parents say they would invest in mutual funds (unit trusts) and stocks, while most of the rest mentioned short-term savings vehicles such as term deposits which, according to most financial experts, tend to be less effective in attaining long-term objectives.

There is room for more sophisticated thinking here. Sophisticated, but not complicated.

Let's assume your child manages to accumulate a reasonable chunk of money, let's say $1000. Where is the best place to invest this money?

Parents who have had exposure to the sharemarket have typically learned about investing through ownership of shares in a company. With $1000 you can probably only buy shares in one or two companies, which does not provide a very diversified investment.

But given that your child is starting young, and has time on his or her side to weather the ups and downs of this investment (and, besides, doesn't have too much to lose), I would go against my principle of diversification and suggest you invest their money in shares. But be vigilant and prepared to sell. Our sharemarket has seen many investment darlings lose heavily in the past.

Which companies should you choose to invest in? A good idea is to choose those that have some relationship to your children's interests. If they were in the US it might be Disney or Coca-Cola. For Australasian kids, our dollar wouldn't buy too many US shares. But with the help of a sharebroker you could look at companies such as The Warehouse, ANZ Bank or Restaurant Brands. Direct ownership of shares will teach kids about dividends, which are profits distributed to the shareholder. Kids can watch their company growing (hopefully) by checking the value of their share periodically. Share prices are listed daily in major newspapers and on the Stock Exchange website.

Better still, from an investment perspective, although perhaps not as exciting from your child's point of view, is an investment in a managed fund such as a unit trust. This gives the young investor a basket of shares which reduces the risk because they are not dependent on the performance of a single company.

You will need a minimum of $1000 to $2000 to invest in unit trusts. Most funds will also let you invest on a regular basis - usually at a minimum of $100 a month. You can also stop these payments when you like so you are not locked in.

I know a number of seasoned investors who say their start came from parents buying a small parcel of shares for them as a child and talking to them about this investment.

For some, it was grandparents giving them a shareholding as a birthday present. It's a fairly dry birthday gift, I grant you, but fast-forward your 12-year-old child to the age of 50 with a mortgage, kids and retirement looming.

Now ask them what gift has the most significance today - the parcel of shares they received all those years ago or the plastic, remote-controlled gizmo?

* Susanna Stuart is a financial adviser with PricewaterhouseCoopers. This article is an edited extract from her recently-published book: Your Family Fortune: Money Strategies for You and Your Family (Random House, $29.95).

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