Saving for your children

Since the dawn of the new millenium, X Boxes, PSPs, Ipods, ipads and smart phones have topped gift lists all over the world causing financial headaches for many parents. Children want the latest toys or gadgets and smart phones. Now one is not saying that such gifts are not appropriate but take a little time this children’s day to explore ways of giving your children gifts that keep giving.

To invest in a child’s economic wellbeing is one of the most fulfilling actions a parent can take. When it comes to saving, children have a huge advantage over adults; the earliest gifts have time to grow and they can benefit from the magic of compound returns.

Parents, grandparents, godparents, aunts and uncles, often think about setting aside some money, or starting a regular savings plan for young children. This can be left undisturbed for several years so that when they are older there is some money available to give them a good start in life. It’s also a good idea to encourage children to save for themselves at an early age. Teaching them to save regularly helps instil the savings habit, and the principles of sound money management that can last a lifetime.

The traditional naming ceremony, for many families presents a good opportunity to jumpstart the saving scheme for a child, so try not to squander all the loose change that you receive! Children often receive token cash gifts during family visits or for birthdays; if they take just a small portion of this and add it to their savings it will be a good place to start.

Several savings and investment schemes have sprung up specifically developed with children in mind. Savings Accounts are ideal for the smaller cash gifts that are a child’s first savings. Many of these accounts offer interesting features aimed at children of ages ranging from birth to say 18 years, sometimes using marketing gimmicks to attract them. It is important to fully understand the features in the account that you choose so that they meet with your own requirements.

Account holders of a Manchester United Savings Account earned an extra 1% in interest when the team topped the league. Problem is, what happens when they didn’t! Such initiatives can be a great way to make saving more exciting for children and encourage them to save some of their pocket money. Some accounts offer bonuses or gifts on joining. Your key concern however, should be the best interest rate and investment performance whilst of course ensuring that the funds are placed in a stable, strong institution.

Because children aren’t expected to have vast amounts of money to save, most savings accounts can be opened with small amounts, sometimes as little as N1,000. To help encourage them to save, children’s accounts tend to attract higher interest rates than standard savings accounts.

Some children’s savings accounts have restrictions as to the frequency or amount of withdrawals. If this amount is exceeded there could be a dramatic drop in the interest paid. Some accounts provide instant access, whilst others may require notice to be given to make withdrawals. Many accounts come with an ATM card which is particularly useful for older children, as their ability to physically withdraw money themselves when they “need” it, makes for a very vivid lesson in money management.

The stock market is generally regarded as the best option for saving for the long-term; in the shorter term it can be volatile. If your plan is to put money away for your child for a long time, say, five to ten years, then it is well worth considering investing in a stock market mutual fund. These pooled investments give access to a wide range of shares so spread the risk. Although children cannot hold mutual funds in their own name until they reach the age of 18, an adult can set up the fund and add the child’s name to the account holder name. The adult can then sign on behalf of the child until they come of age.

Lets imagine a parent invested a sum of N100,000 in a stock market mutual fund on behalf of a child at their birth on 27th May 2003. Lets also imagine they had the knowledge, foresight and ability to continue to invest the same sum of N100,000 on their birthday each year. On 22 May 2013, just before the child’s 10th birthday, the investment totalling N1,000,000 was worth about N2,036,000.00. Even though this example doesn’t take inflation or exchange rate risk into account, it does graphically portray the importance of compound returns over the long term and what a wonderful gift this could have been.

You might be thinking that investing your children’s savings in the stock market is too risky. Savings accounts are supposed to be the “safest” investment vehicles and it is true that you are protected from losing your investment and that you may be getting, say, a guaranteed 4-6% a year. However, over a long period of time, whilst you are keeping an eye on interest rates, the investment is likely to be eaten away by inflation and you could be losing out on the prospect of the greater growth that the stockmarket can bring. Savings accounts are ideal for the everyday, short term savings. If there is long-term money available, stock market risk is clearly a risk worth taking as there is time to ride out any short-term volatility.

Children begin to understand the concept of money from as young as three or four years old as they realise they can exchange it for “nice” things. Sadly, they get very little personal financial instruction in school and most do not learn significant lessons until they are adults and only as a direct result of their own real life successes and failures. Before you know it, bad habits can develop that can last a lifetime.

An American study showed that where financial education covering subjects like budgeting and credit was introduced, after just three months, 45% of those who took part started saving or saving more. Research showed that this would translate to a significant increase in financial stability in that group between the ages of 35 and 49.

Most parents don’t deal with their children’s money management issues until the children are adults. By then, any problems can be both costly and emotionally charged as parents resent having to constantly bail their teenagers and young adults out of financial troubles. Young children provide parents with the best opportunity to encourage good financial habits and avoid problems that may develop later in life in terms of money and relationships if this area is neglected.

Children will learn to manage money through their own experience and the guidance from adults. They learn from trial and error and, role models. Be a good role model. Children are more likely to be good savers if you set a good example.  

 

Nimi Akinkugbe