With the end of one tax year and the beginning of the next, there is a general focus on money at the moment. Or the lack of it. How can we help our kids to do better with their finances than we are? How can we possibly hope to raise a millionaire if we’re not millionaires? The answer to all of this comes in a term much loved by investors the world over: Compounding.
Let’s say that your child is already 5 years’ old. If you put just R400 per month into a simple investment (without high costs) – something like the Tax Free Index Trackers offered by companies like the eftSA – then by the time your child is 15 they will have almost half a million rand. You will have only invested R50 000 and the rest of the R450 000 will come about by the compounding of that money sitting in that investment.
Right now there is a lot of fear and panic around the stock market and investing in general, but what the rich know and use to keep getting richer, and the poor don’t and so keep perpetuating their cycle, is that the stock market crashes every 7-9 years. And this is not a bad thing unless you buy into it while it’s up and sell while it’s down. If you do it the other way round, and buy while it’s down (think of it like a sale) and leave your money accumulating interest for a long period of time, then over time these ups and downs balance out and the overall trend is up.
It sounds complicated, but essentially what I’m saying is that if you commit to a monthly amount and keep putting this in no matter what the market is doing, in THE LONG RUN you will come out with a lot more than you put in. But you have to be prepared to invest in the long run – so for 15 or 20 years; not trying to access the money in 2-5 years.
Where most parents get caught is that they get offered these fancy education funds and investments for their children but don’t realize that the high costs on these accounts are eating away at most of the interest that they would be earning if they just invested in a simple Index Tracker. Something as little as a 1% difference in fees can mean the difference of hundreds of thousands of Rands once you factor in the compound interest that you would have earned on that over 15 years.
You don’t need to be a financial guru or brilliant with money to start investing for your children and their futures. Start small and keep it simple.
Now where do you find this R400 per month? If you’re like most parents I know you’re going over budget every month, not under. Well, in the financial world there’s this lovely little idea called the Cappuccino Factor. It looks at the small expenses that you’re barely even aware of and adds these up over days and weeks and months to see what they really add up to. Let’s say you stop and buy a coffee on the way to work every day and your coffee costs R20. If you do this every one of the 21 working days in the month, then that is already R420. Now your coffee might be a Coke, a chocolate, a manicure, a take-out lunch, or any other small but regular expense that seems insignificant until you add it up. Go take a look through your expenses, find your Cappuccino, and eliminate it. That small change in a small habit can mean the difference between being a millionaire or not.
Now my last caution is in what is done with this money in the long run. I’m all for saving and investing on behalf of my kids, but they need to learn to do this for themselves. If they haven’t learned good money habits along the way then if you hand them a lump sum when they’re 20 or 25 they will probably blow the whole lot in the next year. Most lottery winners end up in the same or worse financial situation a year after their winnings. It’s about developing good habits. My agreement with my own children is that the money I have invested for them will only become theirs once they’ve matched how much I initially put in. So for every Rand that I contribute, they have to contribute equally before they get access to that investment. This teaches them to be aware of their own spending habits, to put money aside and to keep a vested interest in their interest! In other words, they will only benefit from the investment once they have earned the right to it by developing and maintaining good money habits.
And this is the start of your good money habits too. Once you’ve found that R400 for them and watched it grow, why not do the same for yourself? You and your kids could be millionaires if you just take some time and focus today to invest in your future. It isn’t scary or difficult or only for the rich. It is purely about developing good habits. Small, habitual effort now = great rewards later. Bring on the millions!!
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