PERSONAL FINANCE THROUGH LIFES’S STAGES: Teaching your child about money - Part II

Winston Churchill once said, ‘saving is

a very fine thing; especially when your parents have done it for you,’

When I ask parents if they are saving for their children, they often

respond - “I can barely put anything aside for myself not to talk of

saving for my children!” Yet, this could be a huge opportunity lost as

saving for children, comes with the advantage of time. The earliest

gifts have time to grow and can benefit from the magic of compounding.

To invest in a child’s economic wellbeing is one of the most fulfilling

actions a parent can take.

Savings Accounts

The traditional naming ceremony for

many Nigerian families presents a good opportunity to jump-start a

savings scheme for a child, so try not to spend all the money you

receive. Children often receive token cash gifts during family visits,

birthdays and other celebrations; encourage them to save part of it.

Most banks offer children’s savings

accounts which are ideal vehicles for the smaller cash gifts that are a

child’s first savings. These accounts usually come with interesting

features aimed at children of up to the age of 18, and attract their

attention through targeted adverts and sometimes offer bonuses or gifts

on joining. It is important to fully understand the features in the

account you select to ensure that it meets your requirements.

My son, an avid Manchester United fan,

earned an extra 1% in interest on his Manchester United Savings Account

when his team topped the league. Although such incentives are a great

way for making saving more exciting for children, your key concern

should be the best interest rate and investment performance whilst

ensuring that the funds are placed in a stable, strong institution.

Features of savings accounts

Children’s savings accounts can be

opened with as little as N1,000 and offer higher interest rates than

standard savings accounts. Some savings accounts provide instant

access, whilst others have restrictions as to the frequency or amount

of withdrawals, and may require notice to be given without which some

interest may be forfeited. An ATM card is particularly useful for older

children, as their ability to physically withdraw money themselves,

makes for a very vivid lesson in money management.

Cash or Stocks?

After your recent experience in the

stock market, you might be thinking that investing your child’s savings

in the stock market is too risky. As a result, many nervous parents are

missing out on getting the best out of their children’s money. There is

no such thing as an entirely safe savings or investment vehicle, so it

is important that you understand the risks involved.

Whilst it is true that money market

accounts are a good first step and provide, security, easy access and a

guaranteed return, keeping all your savings in cash does involve some

risk. The effects of inflation mean that even the best accounts fail to

keep pace with inflation and whilst your eye is on interest rates, the

investment is likely to be eroded in real terms. Savings accounts are

ideal for the everyday, short term savings but don’t lose sight of the

prospect of greater growth that the stock market can bring. The stock

market is generally regarded as the best option for long-term savings;

market risk is clearly a risk worth taking where there is time to ride

out the inevitable short-term market volatility.

Mutual funds offer diversification by

pooling together investors’ funds to invest in a wide range of stocks,

bonds and money market instruments. If your plan is to put money away

for your child for a long time, say, five to ten years, an equity fund

is an ideal vehicle to consider. Although children cannot hold mutual

funds in their own name until they reach the age of 18, an adult can

open the “account” 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.

The benefit of saving regularly

To mitigate some of the risk of

investing in the stock market one can make regular investments instead

of investing in one lump sum. Through cost averaging you can drip-feed

money into the market and invest the same amount on a regular basis,

say monthly, quarterly or annually on your child’s birthday; you will

thus be reducing your overall average cost as fewer shares or units

will be bought when prices are high, and more when prices are low. This

means that you reduce the risk of investing a lump sum when shares are

overpriced and then lose out when market prices fall.

To mark the birth of their child

Chinedu on 1 November 1999, Udochi and Emeka Ukali invested a sum of

N100,000 in an equity fund. They continued to invest the same amount on

Chinedu’s birthday each year. By his tenth birthday on 1 November 2009,

the investment was worth over N2,500,000. (* table 1) Even after

considering the effects of inflation, exchange rate fluctuations, and

stockmarket volatility, this example does graphically portray the

effects of compounded returns over the long term and what a wonderful

gift this could be.

Children get very little personal

financial guidance in school and many learn significant lessons as

adults and only as a direct result of their own real life successes and

failures. Often bad habits develop at significant emotional and

financial cost as parents are forced to bail their teenagers and young

adults out of financial troubles. As you give your child financial

gifts, remember to give them the gift of financial responsibility

through education and motivation; this is one of the best gifts you can

give, and it will last them a lifetime.

Write to personalfinance@234next.com with your questions and comments. We would love to hear from you. All letters will be considered for publication, and if selected, may be edited.