This blog could change your kids' financial future!
A lot of parents save for their kids by putting money in a savings account. If this is you then it’s great that you are saving. The next question to ask yourself is, could I get more from the money we’ve put away for them? Today most bank accounts give only a small amount of interest so the money isn’t likely to grow very much, if at all. An alternative to putting the money in a savings account is to invest your kids’ money in the stock market. This could potentially grow their savings substantially. I appreciate that for most parents hearing the word 'Investing' sets alarm bells ringing. A lot of parents are worried about the risks of investing.
That’s why I have written this blog. I want to shine a light on the perceived risks and set out how parents like you can manage these risks so you feel more confident to invest and change your kids financial future. Before I talk about risks, let me first provide an analogy for ‘savings’ versus ‘investing’ as it can help visualise some of the points I make later. The House Plant versus The Tree If you keep your kids money in a bank account, this is like buying some seeds for a nice house plant. House plants are easy, you know what you’re going to get and it’s what everyone else has in their house. Over time the seeds should grow and the plant is kept safe indoors. In years to come you could still have that same plant in your home and you can tell people that you’ve had it since your kids were young. They’ll smile at you politely. The other option is you invest your kids money, like buying some seeds to plant a tree. Granted not as many people buy seeds to grow trees but it’s the same process as a house plant. You plant the seeds and give them time to grow. Over time a tree is likely to be much bigger than your house plant. There is some uncertainty as to how big the tree will grow. As the tree grows outside, there is a risk it could get hit by a storm and be damaged. At that point, your reaction may be “Oh no, my tree is damaged and looks awful. I wish I had just planted a house plant like everyone else”. After sometime, however, a tree can repair itself and grow back bigger and stronger than ever. Your friends will see the tree and be amazed at how big it has grown since you originally planted it years ago. Risks of growing a tree (investing) So if people believe that a tree will grow bigger than a house plant, why don’t more people do it? As alluded to above, there are a few reasons:
It’s not what everyone else does
People feel it is a lot of work
They are worried about the risks to the tree
They don’t really know what they will end up with
Each of these is a blog in itself but the main area I want to focus on here is the risks, as this should help towards combatting the other reasons too. People fear there is a risk that their tree will get broken and leave them with just a stump. In the real-world this is the fear that by investing they could end up losing all their money. This is a particular worry for parents who have limited disposable income to start with but are still committed to save for their kids. It is clear where this fear comes from. We see news reports in the papers or on the TV saying, “Company X goes bust, investors lose millions” or “Stock market falls 50%, billions of investors’ money wiped out” (the stock market did fall by over 50% in 2008/9). These headlines are scary. What I want to do in this blog is to show how these risks may actually have very limited impact on the everyday investor who is saving for the long-term, e.g. those saving for their kids from a young age. Let’s take the first headline example: “Company X goes bust, investors lose millions” It is true that if you invest in a single company and that company goes bust you would lose most or all of your money. That’s because investing your money in one company is a bit like extreme gambling. You can win big but also lose everything. It is really hard to identify which individual company is going to do well in the future. We would have all loved to have invested in Google, Apple or Facebook when they were small but it is so hard to know which companies will actually do well. There have been millions of companies that people have said would be ‘the next Facebook’ but have now disappeared. To avoid this risk, you could invest in an investment fund which then invests in hundreds or even thousands of companies on your behalf. Essentially you invest in the entire stock market. This way, if one of the companies goes bust the impact is relatively small. The chances of all these companies going bust is pretty much zero. If they all do then the world is in Armageddon and your kids’ savings are probably the last thing on your mind. When thinking about the Tree analogy, if you plant a few trees, even if one gets damaged you may still be the proud owner of a forest in the future. With this approach, you can still get positive returns from investing but limit the amount you could lose. Now on to the second headline: “Stock market falls 50%, billions of investors’ money wiped out” It is true that the stock market can fall significantly in a short period of time. This happened in 2008/9. People who had invested saw these headlines and felt like they lost a lot of money at that time. The key to that last sentence are the words “they felt” like they lost a lot of money. The truth is, the investors who lost money in 2008 were the ones that sold their investments as they turned ‘feelings’ into action. Those that didn't sell increased their money significantly as the stock market recovered and carried on upwards since 2008. The key to successful investing is not to take actions based on ‘feelings’. If you get scared and worried and take action, you are likely to lose money. Those that ignore the dramatic headlines and just keep investing in the same boring way are more than likely to be just fine.
"If a tree gets damaged, don’t chop it down, just let it repair itself and watch it grow back big and strong."
So investing feels risky, no doubt, but with a long enough time horizon and a discipline not to sell when scared there is potential to be much better off. The returns from a savings account are unlikely to increase fast enough to beat inflation (the increase in how much the things we buy cost). This means if you keep money in the bank for a long time, you’ll probably be able to buy less things with that money than today. As investing is expected to increase by more than inflation, it could be argued that it is more risky to have the money in a savings account. Summary
If you invest there is a chance your kids have less money than just keeping it in a bank account but there is also a bigger chance you end up with a lot more. So if you are saving for your kids, consider investing that money to make it work as hard as possible over all those years. If you plan to give your kids their savings in the shorter term (often described as circa 5 years) e.g. if they are already in their teens, then you might instead want to keep the money in a savings account as investing can be more beneficial long-term. Lastly, the other benefit of taking the plunge to invest is that your kids also learn about the potential upside of investing. A life skill that isn’t often taught is school. If you can make your money make money, you have to work less to make money.
“The best time to plant a tree was 10 years ago, the second best time to start is now”
What to do now?
Every parent is at a different stage of thinking when it comes to investing. Therefore below I set out different options for where you may be in your thought process:
This is all very interesting – but, what is Investing? You should visit our Investing basics page. This provides an introduction to the concept of investing.
I get the risks now, what about the benefits? You can use the calculator on our homepage to see an illustrative difference from savings in a bank account versus investing. You should also subscribe whilst you are there, if you haven’t done so already.
I want to start investing! Go to our guide page on how to set up an investment account with an investment service provider.
I’ve got a question on this topic! Feel free to email email@example.com
We’ll be releasing more blogs and guides on the concept of investing so make sure you subscribe so you don’t miss out. Thank you for reading!
Games and books to help teach your kids about money click here