Why You Should Invest, Not Save, For Your Kids
As a parent, your child’s financial future is going to be one of your biggest concerns.
So much of what you do in life, from writing your will to planning for their education, is going to work towards providing them with financial security.
Many parents make a critical mistake in this.
Caught up in thinking about setting money aside, they set up savings accounts to ensure that there is money for their children’s future.
But in reality, if you want to provide the most possible wealth for your children, then you’re better off investing than saving.
The Current State of Savings
Savings accounts are a secure place to keep money that you’ve set aside, but they’re not a good way to maintain or increase the value of that wealth.
Money in a savings account isn’t doing any work for you or for the financial future of your children.
It sits there passively, acquiring a minimal amount of interest, while its real value depletes due to inflation.
Interest on savings accounts used to provide a balance to this.
It ensured that your money at least maintained its value, if not increased it.
But since the interest rate cuts that came with the financial crash of a decade ago, interest on savings accounts has been unimpressive at best.
Money set aside in them for your children’s future may well diminish in value.
Even if interest rates on savings accounts were to miraculously bounce back, they still wouldn’t be the best option.
Even at their peak, savings accounts didn’t provide the same returns as soundly made investments. Money lingering long term in a savings account is a wasted opportunity.
The Long-Term Value of Investments
Investments, on the other hand, can substantially increase the value of your wealth.
Over the past five years, investment in the S&P 500 provided an average annual return of over 10% (https://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX)– far above the value of any savings account.
Of course, investing in the market has its risks.
Short-term investment, in particular, can see you hit by the downs, not just profiting from the ups.
But if you’re investing in your children’s future then you’re looking at a long-term investment, and that’s when the market really pays off.
The dips are more than balanced out by an overall upward trajectory that will see the money you’ve set aside steadily increase in value.
That increase is all the greater thanks to the compound effect of investments.
If you reinvest any gained value or dividends, then you’ll see the sum you’re investing grow by more than what you put in.
The profits will accrue more profits, and the sum that you’ve set aside for the next generation will really take off.
If you’re saving up to buy something in a year, investment isn’t a good idea.
If you’re saving up to pay for an education in twenty years’ time or a house in thirty, then it’s perfect.
Invest For Your Kids
By investing for your children, you also create an opportunity to teach them valuable lessons.
Once they’re old enough to understand, you can explain what you’re doing.
This can come in broad terms, talking about how investments work and why they’re good.
But if your kids are interested, it can be a chance to get into the specifics. To talk about balancing portfolios; the merits of stocks, bonds, and other assets; even how you pick smart investments.
But there’s also a broader lesson to be taught through those investments.
You can use them to show the value of long-term payoffs compared with short-term enjoyment.
The existence of investments made in their name will show your children how wealth can accrue over time from small amounts.
By showing how much more money they’ll have in this way, it shows them the importance of patience and thinking ahead.
With any luck, this will also teach your children to set up their own investments, both for their future and for their own children.
By setting a good example, you’ll do more to set future generations up for financial security than you could ever do by just talking about these issues.
By investing instead of saving you’ll give your children the best possible start, both in the money you provide and in the knowledge and habits they learn.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
