In a world where financial literacy and investment acumen are increasingly crucial, teaching children about investing from an early age has become a topic of significant interest.
Thembeka Khumalo, a senior client experience manager at Satrix Investments, has emphasised the advantages of involving children in the investment journey as soon as they are old enough to understand.
Khumalo believes that by doing so, children can cultivate a sense of ownership over their portfolios, setting them on a path towards financial independence.
One of the primary benefits of introducing children to investing early on is the power of compounding growth. By starting their investment journey at a young age, children have more time to harness the potential of compounding, allowing their money to grow exponentially over time. The earlier they enter the market, the greater the potential for long-term wealth creation.
Khumalo recommends empowering children to earn their investment contributions through household chores and encouraging what she has referred to as “kidpreneurial” activities.
She said by actively involving them in the process, children can develop a sense of responsibility and accountability towards their financial future. These activities not only foster a strong work ethic but also instil important lessons about money management, goal setting and delayed gratification.
“Show them where their money is invested and take time to explain how things like ex-change traded funds work. If they’re comfortable with the investment landscape at age 12, imagine how much market mastery they’ll possess as adults,” she said.
Initiating an investment journey for children might appear intimidating, but it is crucial for their financial well-being. By introducing them to investing at an early stage and guiding them through the process, you can establish a solid foundation for their future financial security. Here are some valuable tips to assist you in this endeavour:
Start with the fundamentals: Begin by teaching your child about the concepts of money, savings, and the significance of setting financial goals. Help them understand that investing is a way to make their money grow over time.
Cultivate a savings mindset: Encourage your children to save a portion of their pocket money regularly. Explain the concept of compound interest, showcasing the advantages of starting early. This will help them comprehend how their money can grow over time and the importance of saving for the future.
Teach the power of research: Introduce your child to the idea that investing requires making informed decisions. Teach them how to research different investment options like stocks, bonds, mutual funds, or real estate. Emphasise the importance of analysing historical performance, understanding market trends, and evaluating risks.
Make it relatable: Help your child understand the practical applications of investing by using relatable examples. For instance, explain how investing in a company they admire, such as their favourite brand, can make them a partial owner and potentially earn profits.
Open a custodial account:
Consider opening a custodial account, like a custodial brokerage account, in your child’s name. This allows them to have a hands-on experience with investing and witness their money growing over time. Make sure you understand the regulations and associated fees with custodial accounts.
“Only parents and legal guardians can open investment accounts for minors, but extended family or friends can fund the child’s account using a debit order
authority form,” Khumalo said.
“When a minor turns 18 and has full contractual ability (i.e, is legally an adult), the investment account is transferred to them. An email is sent out to the email address on record (parent or guardian’s) detailing the process to be followed to transfer the account to the 18-year-old account holder.
“The minor cannot make legal decisions on their investments until they are 18. The parent or legal guardian will act as an authorised user on the minor’s account.
This is not to say that older children can’t be involved in the process. It is encouraged that you take your children along on the investment journey from as early as possible,” she added.
Start with low-risk investments: Begin by introducing your child to low-risk investments that provide expansion and less instability. Explain the concept of risk and reward and how it varies across different investment options.
Practice with virtual portfolios: Utilise online investment platforms that offer practice accounts. This allows your child to gain experience and develop their investment skills without risking real money.
Encourage long-term thinking: Teach your child about the benefits of long-term investing. Explain the concept of compounding returns and how
patience and discipline can lead to significant wealth accumulation over time.
Be a role model: Lead by example and share your own investment strategies and decisions with your child. Involve them in discussions about your portfolio and explain why you make specific choices.
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