7 tips on getting kids to save and invest

Published in aataxandfinance.com.au, April 2016

Most Australians still need a reality check when it comes to money and investing. Even after more than 30 years of compulsory superannuation, the average Australian retires on far less than what is needed to fund a comfortable retirement.

Tragically, the situation is unlikely to change for future generations of retirees unless more parents actually start “walking the talk”. So how do we create a better future?

First, most Australians do not personally contribute extra to their superannuation, nor do they invest much outside super. Rather, a large majority tend to live for now and spending chews up most of what they earn. I find that trend alarming.

The majority of Australians are still retiring on some form of government pension, and a full pension is only around $20,000 a year. This means most retirees have an existence rather than a lifestyle. Further, on average, Australians only have around $150,000 in superannuation savings, which is far from enough to retire on.

For many young people today it is almost impossible to buy a house. When they do, they are shackled up to their eyeballs with debt and therefore spend the best part of their lives struggling to clear it. Is this the future we want for our children?

If we are prepared to do the “little things” along the way, including to invest, a better future is possible. The Australian singer-songwriter Paul Kelly wrote a song called ‘From little things big things grow’. When it comes to investing, this song should be the mantra on everyone’s lips. There’s no two ways about it: investing, not just saving, should be continually encouraged in schools and at home.

Teach kids about compounding returns

The power of compounding is not understood widely enough. For example, just $1,000 invested when your child is born and compounded at just 5 per cent per annum can grow to nearly $19,000 by age 60 and just under $24,000 by age 65.

To take this one step further, if a parent put away $1,000 every year for just the first 10 years of a child’s life and let this compound at 5 per cent to age 65, the child would double their retirement savings (compared to the current average).

Imagine what could be achieved if children were encouraged to invest $1,000 every year from the time they start work. Powerful stuff, this compounding.

Even better, if every time you or your child set aside $1,000, this money was invested in big blue-chip shares, the compounded return years later is likely to be double or greater.

As the famous entrepreneur and author, E. James Rohn, so beautifully articulated: “Formal education will get you a job, self-education will make you a fortune.”

The challenge is that even with formal education, around 50 per cent of Australians have low language, literacy and numeracy skills. Again I ask, is this the future we want for our children? Don’t get me wrong, formal education is very important, but I would suggest that self-education, including teaching children to invest, is critical.

Providing simple education, a little discipline, and time, will ensure your children can enjoy the lifestyle you would wish for them in retirement.

Although we would all like to say that our children will take to investing like ducks to water, we need to be realistic, as there are so many distractions with technology. Go to any cafe and watch parents struggle to get the children to put their iPads and phones down long enough to eat.

What you can do now

Here are seven things that will assist parents in getting children tuned into saving and investing:

Work out their why. Unless they understand the benefit to them, they really won’t get involved. Offer general ideas about why it’s important to save and invest. Ask them questions about what’s important to them and show them what’s possible.

Help your children write down saving and investing goals, and also rewards that are fun and interesting.

Put up the plan where they’ll see it and get them to mark their current position. Schools have used fun stamps for years. Use these to mark the plan when they achieve important savings milestones. Make sticking to the plan a must and they will follow. Remember, parents’ enthusiasm now will dramatically shape their children’s financial future.

They need to understand the importance of constantly putting money aside for their future and the difference spending will make to the total. Teach them to make wise decisions and know the real cost of spending, say $500 on a new iPad versus investing that money in shares. A savings calculator is a good way to demonstrate how saving and compounding works. Check out ASIC’s compounding calculator at itsMoney Smart website.

Start their investing education on the ASX website. Over the long term, shares can generate great returns. Remember, $500 compounded over 40 years at just 5 per cent per annum becomes $3,500 and at 10 per cent becomes just over $22,600.

Make investing fun by letting them select a couple of shares. Get them to research companies they know such as banks or JB HiFi or Village Roadshow on the ASX website.

Discipline is required. As a parent, every time your child gets money, you need to be disciplined. Get the plan out and follow it with them so they develop good habits.

One of the best books parents can read with their children is ‘The Richest Man in Babylon’ by George S. Clason. It’s a parable about how to be successful and talks about using 10 per cent of your money to reduce debt, 10 per cent for savings and 10 per cent to give away. If everyone adopted a similar mindset, we would have far less people on a pension.

For children, they can save 50 per cent of what they earn/receive as gifts, while developing a habit that goes a long way to creating a better future.