4 Better Financial Future Advantages Kids Have
“Would we have built a better financial future if we had learnt and practised our current financial knowledge as a child?”
Mrs and I often discussed this question as we learnt more about money management and securing our financial future. The key thing is: kids have natural advantages to get started on their journey for a better financial future!
Key financial lessons are a child’s natural advantages for a better financial future
Some common financial lessons I often find in books and blogs to plan better for my financial future, comes down to the following.
- Always pay yourself first
- Keep your investment money separate and let compounding work its magic
- Take a long term view for investing
- Regular dollar cost averaging as a way to manage risk
If you think about it, these points can be really natural for kids to learn and practise!
Lesson 1: Always pay yourself first
The first thing most of us learn about cashflow management and savings is the concept of paying yourself first. It is the first discipline that enables us to start us on a better financial future. Most adults saves only after they have spent their money, if there is any left.
Unlike adults, kids will be able to learn this habit easily as they have lesser responsibilities and commitments to pay for. Most importantly, this habit can be grown regardless of your family’s financial means!
When my kids were younger and in primary school, Mrs and I gave them $2 a day for recess. We started out insisting they had to pay themselves 10% of the allowance first. We made them put the 20 cents into their piggy bank as we knew recess food cost between $1.20 and $2. The $1.80 will be sufficient and they will have some change left at the end of the day. :p
Over time as the kids grew older and habits formed, we gave them their allowance by weeks and let them manage their savings. The key carrot that motivated them: they can use part of what they had saved for reasonable purchases during the school holidays. There are ample opportunities to help kids learn about prudence. 🙂
Lesson 2: Keep investment money separate and let compounding work its magic
One financial lessons I often hear is about automating your savings into a separate account. Its like a ‘fire-and-forget’ method you can set to take place after pay-days. This helps to ensure that we pay ourselves first, before our money starts to pay our bills and expenses.
This separate account of savings ensures your ever-increasing sum of money to further increase through the magic of compound interest. How much it will be eventually depends on how long you allow it to compound without withdrawals.
I get my kids to split their savings: at least 1 part for investing and 1 part for their bank or desired school holiday purchase. This way, they know part of their savings is untouchable and meant for far future, while another is possibly for a gift for themselves in the near future. This helps with nurturing some willingness to part with some of their savings in an untouchable place – ‘fire-and-forget’.
No matter where you put the money in, the magic of compounding will always work in your favour. Just do not leave all their savings physically at home in a piggy bank! :p
Lesson 3: Taking a long term view for investing
If you buy into index funds, you should know the long term growth trajectory of key indices are usually positive. Over a 20-30 year period, the value of an index fund will grow even if there are occasional downturns. Hence most investing advice have always to invest for the long term, not speculate in the short term.
This 20-30 year duration is perfect for kids to start their journey for a better financial future! As long as they build habits to pay themselves first and be prudent with their purchases. This will allow them to save in high interest account or to invest regularly.
Lesson 4: Regular dollar cost averaging to mitigate risk
All of us start our journey somewhere, all for a better financial future. Just because I cannot afford to first invest a lump sum of $1000, it should not stop me either.
Dollar cost averaging (DCA) is a concept of investing that encourages regular investing that mitigates market risk. You no longer need to be too worried about the impact of investing at the peak of the market value.
For my kids, I chose Stashaway (this is not a sponsored post/link) years ago to be the investment vehicle. Stashaway is a robo-advisor I had tested and compared with AutoWealth and Syfe, and I liked Stashaway’s performance and resilience.
As it is a vehicle I chose to use for my kids, having a low expense of maintaining a robo-advisor was important. The low minimum investment amount ($10) and zero fee for new investments of Stashaway won me over!
This made it perfect for kids, as it takes 50 school days before my kids save $10 if just based on their ‘pay-themselves-first’ 10% saving hahaha! My kids invested every 2-6 months, allowing them to DCA through the peaks and troughs of the market.
During bull markets, I will show them the benefit of investing over keeping their savings in a piggy bank or traditional bank account. Conversely during a downturn, I will also show them their losses to emphasise on the fact that markets is volatile and it is important to stay invested for the long term.
Seriously, they did not care and continued to pass me their savings every 2-6 months – ‘fire-and-forget’ indeed haha 🙂
A better financial future takes time and effort
While a school equips our kids for work, the best thing gift for our kids are lessons for the ‘school of life’. We might have started this journey for a better financial future only after our first 20-30 years, but we can help our kids to build a better foundation for their future earlier. I hope you do the same for yours too! 🙂
MrAmass
