Dubai: Did you know that Warren Buffet - one of the richest men in the world, known for being a savvy investor - started investing at the age of 13? Driving back home one evening, I heard the voice of the author in an audiobook tell me this cool fact. While the book was supposed to be a guide on how you can make better financial decisions, a self-help book I was listening to for my own benefit, this one fact left me wondering – I can’t go back in time and start investing early, but can my daughters at least do better than their mum in becoming financially savvy?
The power of compounding … that’s what’s made Warren Buffet into one of the richest people on Earth. He invested early, and let the investments grow over time. But if you are a parent like me who has never learnt the ropes of investment, how can you train your kids to be, what they call, money multipliers?
According to Akshay Sardana, a financial adviser and the Vice President of Strategy and International Development at The Continental Group, parents can’t really communicate that sense into children, without first modelling it themselves.
I guess it is true - Children are more likely to learn from what they see us do than from what we tell them to do.
1. Smart parents; smarter kids
“A 2003 research from Cambridge University revealed that a person’s approach to money is shaped by the age of seven. So, unbeknownst to many parents, children are picking up on their financial behaviours. In other words, how you manage money — shopping preferences, decision-making, approach to savings, budgeting, etc. — is shaping your child’s foundational understanding of finance. From the outset, it is important to instill the idea of saving first and spending later,” he told Gulf News.
So, if you have always struggled with being imprudent with your finances or being an impulsive shopper, watch how your kids might be picking up on those habits as well.
The solution? Get children involved in the changes you are bringing in to your own financial habits!
“Parents who create a participatory culture, allowing each family member to voice their financial ideas and goals, often excel, besides those who constantly engage their children with anecdotes and stories related to money and make the learning more relatable. That is to say, parents have a great responsibility to set a good example and ensure they do right by their children,” he said.
So, Step 1 in making your child more financially resilient and wise is to identify your own financial blind spots, work on them, and guess what? Your children will be watching and learning the whole way!
2. Empower children with financial autonomy
Another simple step you can take as a parent is to give children some real-world practice, which can go a long way in settling financial concepts deep into their little minds. If your children are younger, give them an allowance for chores like slaying the dragon under their bed (dusting!) or being mum and dad’s little helper when there is a deep-cleaning of the house. For older children, the chores or responsibilities can be more complex, with the allowance also increasing, based on your assessment and their needs.
“A bit of practice can be worth more than a ton of theory. So, in addition to theoretical financial education as part of the curriculum. For example, the ‘eidiyah’ that children receive could be a great source of learning. Younger children could be taught to store them in their money jar and accrue savings, whereas older ones could open a bank savings account and learn about growing wealth. Parents could also leverage the power of visualisation by providing money jars labelled with goals such as a new bike or a vacation. Such exercises will have a far deeper and long-lasting impact on children’s financial behaviours than mere theory,” Sardana added.
Younger children could be taught to store them in their money jar and accrue savings, whereas older ones could open a bank savings account and learn about growing wealth. Parents could also leverage the power of visualisation by providing money jars labelled with goals such as a new bike or a vacation. Such exercises will have a far deeper and long-lasting impact on children’s financial behaviours than mere theory.
3. Differentiate needs from wants
Another critical concept to build into a child’s mind is of spending consciously and prioritising needs over wants. This can be especially tricky in the age of five-year-old social media influencers popping up on your child’s tablet, unboxing their latest doll-house or Lego race track. A simple way to introduce ‘delayed gratification’ is to encourage them to give up on some short-term purchases for more valuable gratification.
“For example, you can urge children to compromise on a few vanity purchases and use the saved capital to finance a more value-oriented activity like a family vacation, thus teaching them a lesson in goal-based financial planning,” Sardana said.
4. Level up your game
If you are teaching a serious concept like financial astuteness to children, make sure you don’t make it boring! There are several ways of gamifying money management, especially in today’s technology-driven life. Look for games that provide children with real-world financial scenarios, designed to teach them a specific concept like banking or credit-card purchase.
“Such platforms equally emphasise learning through a rewards-based model. Closely mimicking the real world, the gamified scenarios help children prepare for financial eventualities in life. Likewise, parents can gamify financial education by commissioning children to locate store discounts, sales, and the most sensible product among the many options. Additionally, family game nights could be both fun and educational with finance-themed board games like Monopoly. The element of fun ensures that learning is more effective and engaging. Such seemingly trivial activities will be of great consequence in the future,” Sardana said.
5. Inspire making, not just saving, money
Once you have created a solid understanding of earning money in children, the next step to really turn children into financial wizards is to communicate this concept: Money is not just for saving, you can also make money. Even if you haven’t opened up an investment account for them online, introduce the concept by asking them to ‘park’ their money with you, to get profits on their savings on a later date. This teaches them the power of compounding, according to Sardana.
“Conversely, if you give them more money than they were owed, you can deduct that from the next allowance, thus emulating how loans work,” he added.
With these simple tips you will be able to lay the foundation of core financial concepts in your child’s mind. But once they are ready to really get into the world of finance and investment, how do you proceed?
Can my child be the next Warren Buffet?
Dr Jelena Janjusevic, Head of Accountancy, Economics and Finance (Dubai) of the Edinburgh Business School at the Heriot-Watt University, shared some advice on how parents can build on their child’s interest in making money, through a steady and realistic approach.
So, whether your child is five or 15 years old, the key is to start today.
“Buffett frequently emphasises the importance of starting to invest as early as possible. He often says, ‘The best time to plant a tree was 20 years ago. The second-best time is now.’ By starting early, investors can take advantage of the power of compounding and give their investments more time to grow. If children start to develop an investing mindset early, and start under parental control, there are many benefits for them, starting from the guided development, learning by doing, and still not going into big risks,” Dr Janjusevic said.
At the same time, a major advantage of starting early is that it will help parents understand if their children are even interested in the world of investment.
“If there is no interest or motivation in the child to invest, this is also valid and good to know,” she added.
If your children do show interest in investing, understanding how markets work and having realistic expectations is important.
“When parents and children start investing, it's essential to have realistic expectations about the potential returns. The actual returns can vary widely depending on factors such as investment strategy, market conditions, and time horizon,” Dr Janjusevic said.
“My investment philosophy is centered around long-term value creation. I would advise children and teenagers to ignore short-term market fluctuations and focus on the underlying fundamentals of the businesses they invest in. As Buffet often says, ‘Our favourite holding period is forever’,” she added.
Keeping these fundamentals in mind, she provided seven practical considerations that parents and young investors should remember, when it comes to dealing with investments, stocks and other assets, and the returns you can and should expect.
1. Historical market performance:
“Historically, the stock market has provided average annual returns of around 7 to 10 per cent after adjusting for inflation over the long term. However, it's important to note that past performance is not indicative of future results,” she said.
2. Diversification:
According to Dr Janjusevic, by diversifying their investments across different asset classes – such as stocks, bonds, and real estate – and geographic regions, parents and children can potentially reduce risk and enhance returns over time.
3. Risk tolerance:
“The level of risk tolerance varies from person to person and should be considered when setting investment expectations. Generally, higher-risk investments have the potential for higher returns but also come with increased volatility and the possibility of losses,” she said. Building this risk tolerance in children can help them undergo market changes more resiliently in the future.
4. Time horizon:
“Investing is typically a long-term endeavour, and returns are best evaluated over extended periods. Parents and children should have a clear understanding of their investment goals and time horizon, as shorter-term investments may experience more volatility and fluctuations in returns,” she said.
5. Compounding:
“One of the most powerful aspects of investing is compounding, where returns are reinvested to generate additional earnings over time. The longer the investment horizon, the greater the impact of compounding on overall returns,” she added.
Investing is typically a long-term endeavour, and returns are best evaluated over extended periods. Parents and children should have a clear understanding of their investment goals and time horizon, as shorter-term investments may experience more volatility and fluctuations in returns.
6. Inflation and taxes:
“It is important to consider the effects of inflation and taxes on investment returns. Over time, inflation erodes the purchasing power of money, while taxes can reduce net returns. Parents and children should factor these considerations into their investment planning,” Dr Janjusevic advised.
7. Educational value:
“Beyond financial returns, investing can provide valuable educational benefits for children, including learning about financial markets, risk management, and long-term planning. These skills can be invaluable in shaping their financial literacy and decision-making abilities,” she said.
“Over time, as children grow and become more financially informed, you can acquaint them with various investment instruments, associated risks, and possible returns, further propelling them towards financial independence,” she added.
Introducing your child to the world of investing
Once your child has a solid foundation in financial literacy, you can explore safe and age-appropriate investment options together. There are different types of platforms that are available to you as a parent, and to your child, and understanding how they work is extremely helpful:
• Robo-advisors: These automated investment platforms are a great option for beginners, offering pre-built portfolios based on risk tolerance and investment goals. To know more about how these robo-advisers work, click here.
• Fractional shares platforms: These platforms allow users to invest in portions of stocks, making expensive companies more accessible for smaller investors. If you are keen on exploring fractional shares specifically related to real estate investments, read our detailed guide here.
• Educational investment platforms: There are also several platforms that offer educational tools and simulated investment experiences to help children learn about the stock market in a safe environment.
While there are several international platforms – both for desktop and those that are mobile friendly – that you can look at to start your child’s investment journey, there are three things that you should check, to make the right choice for you:
Minimum investment: Some platforms have minimum investment requirements, which may not be suitable for children with small amounts of money.
Fees: Be aware of any fees associated with the platform, such as account management fees or trading commissions.
Parental controls: Choose platforms that offer robust parental controls to ensure you oversee your child's investment activities.
By following these tips and fostering a positive and open conversation about money, you can empower your child to become a financially literate and, potentially, a successful investor in the future.
