This article is taken from our autumn 2021 edition of Equinox. Click here to download the full magazine.
When it comes to investing, your two biggest allies are time and good habits. The sooner you start, the more time you give your investments to grow and the larger your nest egg is likely to become.
The above concept isn’t particularly inflammatory or revolutionary. However, the trouble is that most people aren’t taught the concept of investing until their mid-20s when they get their first job and are enrolled in an employer pension scheme. Even then, auto-enrolment and default investment options mean there’s a good chance younger generations aren’t building the foundations of their investment knowledge until a much later date.
Since finance and investing is not typically taught in schools, it’s up to parents and grandparents to help children and grandchildren learn the basics. Knowledge is power, and a good financial education could be the most valuable gift you leave for future generations.
The younger generation is increasingly aware of climate change issues and eager to work towards a better future for all. Perhaps the key to getting children engaged in finance is to explain how investing can have a positive impact on the world.
Let’s take a look at some of the ways you can start the conversation around money without overwhelming or disenfranchising them.
Talk about money!
As Brits, there are a few topics that are considered to be off limits at the dinner table: politics, religion, sex and money. Well, it’s safe to say Brexit brought politics around the dinner tables and I’ll leave religion and sex to your discretion. But, in my view, money needs to be put back on the table.
Just talking about money whenever it’s relevant during your day-to-day lives is invaluable. Whether that’s shopping for deals, paying the credit card bill or showing how much electricity the Xbox is actually using!
You also don’t need to use terms like “opportunity cost” or “savings ratios” to begin instilling good money management skills. Simply encouraging children to make financial decisions can introduce basic financial concepts like saving and spending, such as giving them an allowance or paying them for chores or small jobs.
The Eighth Wonder of the World
If you’re not a fan of Albert Einstein (credited with the heading above), there are plenty of alternative quotes or expressions that can be used to start a conversation around the power of compound interest.
The power of compounding is at the heart of how investors make money but it’s a hard concept to comprehend when you’re young. An interesting exercise is to help your children come up with some long-term (in relative terms) goals.
Here’s how it works:
- You’ve given them £3 pocket money for the week. They can spend it all now or can save it towards that game they really wantthat costs£15. As a reward for saving it, you’ll give them a 5% interest a week. They decide to save half.
- After two months, they’ll have saved £12 of their pocket money. But, thanks to the power of compound interest they can trot off to buy their £15 game.
- Bearing in mind that “long term” for a child is potentially going to be a few months to a year, it allows you an opportunity to show the power of compounding in action.
Once kids have a handle on basic money management, it’s probably a good time to introduce the basics of investing. But explaining that a stock or share allows them to have ownership in a company is best done with companies they know.
Whilst toys or the latest fad may be a good way to go at younger ages, for older children and teenagers, the answer may lie in environmental, social and governance (ESG) investing.
Children, and particularly teenagers, are becoming increasingly aware of the climate crisis that will define their futures – perhaps more so than their seniors. Whilst activities like recycling can be a brilliant way to engage children with environmental issues, the impact of investments is also a great topic to spark their interest.
In his book How Bad are Bananas, Mike Berners-Lee says, “every time we spend or invest money, we support one version of the future or another.”
Investing is all about allocating capital and discussing ESG investments can show younger people how their money can have a positive impact on the world they grow up into.
Disclaimer: The content contained in this blog represents represents the opinions of Equilibrium Investment Management LLP (EIM) and Equilibrium Financial Planning LLP (EFP). The commentary in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the viewer. Past performance is never a guide to future performance. Investments may (will) fall as well as rise and you may not get back your original investment.’