Investing isn’t child’s play, but it’s never too early to start investing for a child and teach them about money.
How are parents saving and investing for their children?
We often think of cash savings for children. And they can be a useful way to teach children how to save money and work towards goals like new toys.
In fact, HMRC’s most recent figures (2022/23) show that almost two thirds of Junior ISAs paid into were Cash Junior ISAs.
However, if you’re saving for a longer period, cash isn’t the best option.
Should you save or invest for your child?
Over a period of five years or more, investments usually give you a higher return compared to cash savings.
In fact, there’s over 100 years of data showing that for 91% of 10-year periods, investments in shares have done better than holding cash.
Children have time on their side, so in many cases it’s better to invest than save for a child.
Just remember, unlike cash, the value of your investments can rise and fall, so your child could get back less than you put in.
How to invest for your child?
One way to invest for your child is through a Junior Stocks and Shares ISA.
When they can access the money in a Junior Stocks and Shares ISA at age 18, that additional growth could be a hefty future deposit on a house, an education, and the foundation of a lifetime.
But if you’ve ever thought about giving a freshly turned 18-year-old a bunch of money, you’ve also possibly formed the mental image of how quickly that money would disappear.
You might ask yourself then, if I invest for a child, should I keep my child’s investments a secret?
Absolutely not.
Recent data shows HL Junior ISA clients turning 18 aren’t as irresponsible as you might think – most of the money was left in their accounts within a year, and around a quarter of those clients topped up their accounts within that year.
But you still do need to make them ready to handle the responsibility from an early age.
Here are five tips to help make your child a great investor.
This article isn’t personal advice. If you’re not sure whether an investment is right for your child, please ask for financial advice.
Tips to help teach your child about investing
Have everyday conversations about money
Make talking about money normal from an early age. When you’re out and about, talk about the costs of your coffee, your grocery shopping and how you make money to pay for them.
While we might have grown up with coins and notes, which are great ways of teaching children about money, contactless payments make it more difficult.
Explain the basics, maybe even showing them your bank account and that the money comes from somewhere.
Get them invested in the process
Talking to your child about their investments is a great start.
Help them feel like they’re an investor, throughout their childhood. That way, they’ll never feel like investing isn’t for someone like me, because they already do it.
They won’t then get scared about having investments when it’s their turn to manage their account.
Make their investments easy to understand
Children can build up their knowledge gradually, without noticing.
One easy thing to point out is the brands they might have within their investments. High street shops, the clothes they wear, even the parts that might be in their computer or video games console.
Tell them they own part of that company.
Having a diversified portfolio is key, so let them know why that’s important. Too many eggs in one basket is a great way of helping to demonstrate this.
Later down the line you could ask what brands they’d like to own and why and use it to discuss how you pick investments. You don’t need to be an expert or a great teacher, just talk when they show interest.
Involve them in the decision process
When your child is a bit older, involve them in investment decisions about their account.
While they won’t be ready to call all the shots, let them know what you’re doing and why.
And you can let your children make some choices so they can feel like decisions are in their grasp. For example, buying a small amount in shares of a company that they like, though this is a higher-risk option.
Let them know about long-term investing
Junior ISAs are long-term investments as a child can’t access the money until they’re 18. This means children can see for themselves the impact of long-term investing, as opposed to making speculative purchases over the short term.
It might be helpful to go over your child’s portfolio every six months or year, so they’re comfortable with short-term rises and falls, and how a portfolio can grow over the long term. My dad did this with me.
Another vital lesson, especially in this day of social media, is that money is what you have in your account, not what you spend.
Seeing someone with fast cars or lots of toys and gadgets means they’ve spent it or even borrowed it, not that they have money. And that money probably isn’t being given the chance to grow.
Hopefully if you go through this with your child as they invest, they’ll be ready to start making the right decisions when they turn 18.
They won’t be alone as you can still be there to help, and we’ll be there too. They’ll have a great support network.
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There are other ways to invest for a child, including the Junior SIPP which allows for long-term investing in a pension, while benefitting from tax relief.
Remember, you can’t usually access money in a pension until age 55 (which will rise before the child reaches retirement)
Pension, ISA and tax rules can change, and benefits depend on individual circumstances.