Talking about budgets is often the starting point in the financial education of kids. While budgeting can help you live within your means and stay solvent, only investing will help you become wealthy and financially independent one day. However, there is often a lot of jargon in the investment world, which is perhaps why we often don’t explain it to kids. Here are five investment basics for kids in plain language anyone can understand from the CEO of an investment company.
Saving is for the short term, investing is for the long run
Setting money aside monthly for unexpected expenses is a good start. As the last few months have taught us, an emergency fund is essential. Because you might need this money at any time, you don’t want to invest it in anything where the value will fluctuate too much, or where you can’t access it at short notice. This money should be kept in an easily accessible form, like a savings account or a money market fund. However, if you want to save for bigger long-term goals you will need to give your investment enough time to grow and invest in something that offers a higher return on investment than cash or money markets.
Time is the secret ingredient when it comes to growing wealth
Very few people become wealthy overnight. Listening to the stories of great business people, it soon becomes clear that a lot of hard work preceded their ‘overnight success’. The same applies to money. Every year’s gains add to that of the years that came before, and these gains add up. The key is not to give up or touch this money too soon. If you planned to invest your money for a certain time, it is usually best to stick to your plan unless something material has changed.
Invest in the right things for the right reason
This is the part that seems to trip many people up. We often get asked “what is the best investment?” However, there is no such thing (with a few caveats I’ll get to last)! The right investment is one that will do what you need it to do. If you need an emergency fund, then the right investment is one you can access quickly and where what you get out is more or less what you put in. But if you are investing for retirement, then accessing it now is not important. You also don’t want to just get back what you put in, because in thirty years’ time that money won’t buy you very much because things get more expensive over time due to inflation. You want your money to grow faster than inflation, so you can buy the same things (and maybe even more) in 30 years’ time.
Asset class ABCs
Asset classes are a way of sorting the things (instruments) we can invest in into groups by how they tend to behave. There are four basic types: cash, bonds, property, and equities. Less risky assets give you lower returns while more risky ones provide higher returns in the long run. Risk can sometimes mean losing money, but mostly it means an asset does not behave as expected. The least risky assets are cash and money markets, but they typically offer the lowest returns over the long run. Bond investments pay an agreed interest rate over an agreed period, and this is typically a higher rate than you can get from cash investments.
Property investments are more risky than cash and bonds, but tend to offer higher returns. In addition to residential property, you can invest in things like shopping centres or office complexes, where people pay rent. When it comes to building wealth in the long-term, however, shares – also known as equities – are the place to be. These are like owning a part of a company. However, share prices move up and down all the time, sometimes by up to 30%, like we have seen recently. Because of this, it is often better to hold a balanced or multi-asset portfolio. This just means you combine all the asset classes to get the best of all worlds – more return for less risk.
Lastly, choose whom you trust with care
While each type of investment has its place, not all investment services providers are a safe bet. Some may be outright dishonest, others may be incompetent. Be careful of anyone promising fantastic returns in a short space of time (as you’ve just learnt, making money takes time!). Always check that the person you entrust your money to can be trusted, and invest with a company you know, and that is covered by solid regulations.
By Anet Ahern, CEO at PSG Asset Management
