Siya and Mukund have been lovely siblings and are of age 10 and 7 respectively. Very young and full of energy. Their hobbies are similar as well. Both like skating, swimming and mathematics. They do good in their school and get excellent grades in academics. Right from their childhood they have learned an important lesson – accumulate wealth, save and use it for future goals. To simplify it for them, they have been saving funds out of their pocket-money, gifts received during the year (e.g. Diwali, b’day, etc.) and put it in their piggy bank which is carefully stored inside their father’s trust worthy wardrobe on the top shelf to prevent any loss of their funds. Not to be surprised, these piggy banks are locked ! Tiny brains but have put into practice very valuable lessons :
1. Save money
2. Keep it safe for future
In my opinion they are doing brilliantly when we look into their financial prudence. I do not expect them to be financial wizards and invest their small savings into a structured investment product and look out for returns. At their age, the lessons which they need to learn are :
B. Have a Goal.
These goals could be as simple as – buying a X’Box video game, brand new roller skates, using it as a pot to withdraw money for their stationery or even for their frequent trips to the local ice cream shop.
Investing for Kids
I met Siya & Mukund towards the end of autumn and asked much they had saved so far. The answer was stunning. Siya had saved Rs. 8,000 and Mukund had saved Rs. 10,000. The money was stored in their piggy bank. I had an opportunity for them to learn how to invest and make money out of money. Till date they were adding to their money by saving from their pocket money. The accumulated money was just lying idle.
So this is how my conversation went with the kids :
Me : Siya & Mukund, what does your money do in your piggy bank ?
Siya – I don’t know, it remains in it. What should it do ?
Mukund – Perhaps it is dreaming to come out and be spent on the new X’box.
Me : Do you think that it can grow by itself if you don’t add more money into it. Siya – can your Rs. 8,000 become around Rs. 9,000 after one year.
Siya : No !! How will it grow ? I need to add more funds to it to increase it. Wow ! it will be a good idea if it becomes Rs. 9000.
Mukund – Won’t we love additional Rs. 1000 ??
Mukund : Uncle can you make my Rs. 10,000 to Rs. 11,000 in one year ? That will be around Rs. 100 per month.. Amazing – I would be able to eat 5 more chocolate bars without touching my Rs. 10,000.
Me : Yes it should be possible.
Siya & Mukund (can’t wait for this to happen) – how how ?? We want it to be done.
Both of them rush away and bring their piggy bank. Even before I could explain they are busy counting their crushed notes.
Me : But you need to understand what I am proposing to you. If you are patient, you will be successful. I will take your money from you today and give it to a company called a Mutual Fund. They get similar amount of money from small saver like your and invest the money in good companies. The money grows over a period of time. You should not ask me to return your money before the end of 1 year. In return, I will try my best to show you a good return.
Both the kids stared towards each other and said almost at the same time – ‘What if our money is never returned and the company we invest in goes bust ??’. Both of their eyes were full of questions about the upcoming opportunity.
Me : True – any one can go bust. But does it mean that you do not give it a go ? Didn’t your father give you both an opportunity to prove that you could skate ? If he would have doubted your skills, you won’t have gone to the skating classes and wouldn’t have earned the trophy which you proudly show to all of us. Obviously we will do the necessary checks to ensure that we invest in a good place. But the risk is always there – though very minimal.
The kids were not really convinced that day. They would rather love to see their money safe in front of their eyes rather than with some one who may never return it back. I thought I lost the battle. I visited them next day to check what they thought. To my surprise they agreed to invest but only with 50% of their amount as they wanted to explore the process. I was over joyed. If these kids were about to learn a very important lesson at this stage, they will probably become successful investors in future. One of the common reasons for not investing is the possessiveness with cash and wanting to have something which you can see and touch. Another reason is being extremely risk averse and hence not exploring any investment opportunity.
The next day I took their cash and got it deposited via their father in their respective minor bank account. After getting the necessary paperwork, I got their 50% money invested in bond funds to reduce the risk on their money. This investment would potentially give around 8-10% return in a year’s time and at the same time be liquid enough to allow the kids have access to their money when they needed. Both liquidity and risk were important to buy their confidence.
After 2 months I again got in touch with Siya & Mukund. The money they had invested had good returns. They were happy to hear that what I had painted for them was actually true. In order to transform it into reality, I plan to get the funds sold after 1 year and get the money back into their hands with returns. This will allow them to learn the following important lessons :
1. Money can and should be invested.
2. Investment results in growth of money, i.e. money should create money;
3. Investments are not always risky.
4. They can be sold and accessed when needed to achieve the goal.
So this was my experience with my youngest clients. I thought to share it with you and get your opinion on any better way to incentivise kids to invest and shape their financial future.
I thought to update this article today to see what happened after a couple of years (after 5 years)..
Their money was invested in a Debt Fund and a Balanced Fund (Hybrid Equity) so that they could build their confidence in investments. Both Siya & Mukund continued to invest as time progressed via top-ups to their investments. Today they have a reasonable amount of Corpus which has been invested an is growing at a CAGR of 9%. The healthy return keeps them motivated to add their surplus savings into the investments and they are now a walking example of … money creates money.
On a side thought, while the kids had patience, not all adults have it. Patience is one of the key virtues which lets wealth grow.