It can be very hard to find the extra cash for pocket money and investing for your children at the moment, but a little can go a long way and provide huge benefits in the future, says personal finance columnist and author MARY HOLM. She shares her decades of financial experience with us.
Want your kids to own a house one day? Start early with KiwiSaver
One of Holm’s strongest recommendations is to open a KiwiSaver account for kids as early as possible. Then start making regular contributions as soon as you can. Even small, regular payments can grow significantly over time thanks to the magic of compounding interest.
“It could be a tiny amount, it could even be less than five dollars a month, it could be five dollars a year, but set up when the kid is a baby, by the time the child is in their early 20s, there’s a considerable amount there that has grown just because of the compounding,” she says.
Holm, who has recently published a revised and updated copy of her number one selling book Rich Enough? A Laid-Back Guide for Every Kiwi, encourages framing this KiwiSaver pot to the kids as a tool for buying a first home rather than for retirement, as this can feel just too far away for young people.
She suggests choosing higher-risk funds for children, such as a growth or aggressive fund, as these tend to provide better returns over the long-term, despite the short-term fluctuations they may experience. And when you’re investing for children, time is on your side. Watching the fund go up and down in value can be a great learning experience for kids too.
“It will go up and down a lot over the years, but over a long period, it will almost certainly grow more than it will in a lower-risk fund,” she says.
And remember, the government will contribute up to $260.72 a year too, based on how much you put in and this kicks in from age 16. Put in a total of $1042.86 or more a year, and get the full amount.
Let kids make mistakes while the stakes are small
Holm believes pocket money is a valuable teaching tool, even if the amount is modest.
“You can teach a child a lot by giving them, I don’t know, $10 a week… letting them spend half of it, but encouraging them to save half.”
She recommends using a regular bank account rather than KiwiSaver for this purpose, allowing the kids to access their savings and learn the value of delayed gratification.
“Six months later there might be enough there to buy something that they’ve really had their eye on,.” she says.
Holm adds that it is important to let kids make mistakes – while the stakes are small.
“Let the child make mistakes with their money… learn that they’ve bought something that didn’t give them much pleasure.”
Consider non-KiwiSaver investments
For parents with the means to do more, Holm suggests setting up a separate investment fund outside of KiwiSaver. Again, even putting away just $5 on a regular basis can help build a tertiary study fund, provide money to start a business, or another goal your child might have when they’re older. Remember that KiwiSaver funds can not be withdrawn for any of these purposes.
“It can be wonderful if parents can support (their kids) to some extent in a venture, without necessarily paying the whole lot.”
Holm says balance is needed in deciding how much to financially support your children, and a lot of it can depend on the personality of the child.
She adds that most KiwiSaver providers also offer funds with a range of risk levels that sit outside KiwiSaver, allowing you to withdraw the money more easily.
Encourage generosity and family contributions
Holm also sees value in encouraging children to give small gifts to family members, to help foster a spirit of generosity.
“Just little things, five dollar items. It’s quite a nice message to send to kids that it’s good to be generous.”
She notes that extended family members often enjoy contributing to a child’s financial future and making regular payments into KiwiSaver or another form of investment fund can be a great way to do this, even if the amount is modest. So offer this as an option if family are asking how they can help, or what they can give.
“Aunties and uncles and grandparents might like to transfer five dollars a month. It helps to make you feel like you’re contributing to the child’s well-being,” Holm says.
Harness the power of the automatic transfer
If you’re setting up KiwiSaver or investment funds, or even just saving for something for the kids, automatic transfers are your friend.
They work so well because you forget all about them, adjust your life to suit the amount of money you have left after the transfers are taken out and then find yourself with a lovely nest-egg at the end.
Set these up with the children so they can see that – no matter how small – a consistent savings habit reaps benefits, Holm says,
And remember, whenever possible, increase the payments you’re putting away to help build your savings further.
Respect and trust your child with money
Holm says she hears of parents still watching over their children’s money decisions when they’re well into their twenties. .
“I think it’s appalling behaviour… treating the child as if you don’t trust them.”
While parents can talk to them about their decisions in a support capacity, she believes that if a parent is treating a child as if they can’t count on them to handle their money well, then it’s almost an invitation to the child to mishandle it.
“If someone treats me as if they don’t trust me, I’m more likely to be untrustworthy,” she says.
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