Simone Bilton, Associate Investment Director at Investec, explains how a grounding in financial matters will benefit your children.
As an investment manager, one of the most rewarding aspects of my job is promoting financial capability. It’s a valuable life skill and one that I believe should be taught from a young age.
Financial capability starts at home
I’ve been told many times by educational professionals that there’s a lack of support for schools when it comes to teaching children about money management, savings, budgeting, or investing.
In the absence of formal education, I have worked with many parents to foster these necessary skills in their children, and I’d encourage you to do the same.
Starting early provides an investment advantage
One of the most important financial concepts children should learn is the effect of compounding.
Compounding is a benefit of investing for long periods. As your investments deliver a return, you can reinvest this money. Now, it’s possible to generate returns on a larger sum than you started with. Continue to do this year after year and you can typically expect far greater returns in year ten than in year one.
The longer you invest, the more chance you’ll have to benefit from compounding – so this is a valuable lesson to learn early.
Inflation is the enemy of saving for your children
Most households today are feeling the impact of inflation and it is an important concept for children, as well as adults, to understand.
Inflation describes the growth in prices of goods and services year-on-year. At the time of writing, the rate of inflation is 7.9%. Put simply, this means that goods that would cost you £1,000 this time last year will cost you £1,079 today.
Imagine you were keeping £1,000 in a cash account, where it wasn’t earning interest. Each year that passed after you deposited it, you’d be able to buy less with it. It takes around 30 years for its buying power to halve.
You can invest on behalf of your children
Saving through a children’s bank account is a great start, and can help to teach young children about interest, inflation, and compounding.
However, in the current economic climate, it may not serve your child’s needs, if you’re putting money away for a long time. Other options include:
A Junior ISA. This allows you to invest tax-efficiently on your child’s behalf, in an account they can control from 16 and withdraw from at 18.
A child’s pension. This allows you to invest tax-efficiently on your child’s behalf, in an account they can control from 18 and withdraw from when they retire.
These financial products are only suitable in certain circumstances and have tax benefits that can be valuable but complex to understand. You might want to discuss them with a financial adviser before locking money away.
When to talk to your children about money
The amount of exposure you provide your children to family finances, and at what age, is a personal decision. However, I’d suggest that starting early has far more benefits than it does drawbacks.
If you already have a professional advisor, you can ask them to provide a teaching session for you and your children to attend together. Your advisor should adapt their language and examples for your child’s level of understanding.
I’m grateful that my dad allowed me to attend a meeting with his investment advisor at the age of 16, as it’s through this exposure that I found my career in helping others.
This information does not constitute financial advice or a personal recommendation. Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.
