Sound financial education not only helps children develop a healthy relationship to money, but also improves their financial IQ. What shares are, how interest rates work, and the ideas behind savings plans and passive income are important topics for children to understand.
It starts with the parents
According to British research institute YouGov, only four out of 10 parents in Germany make financial provisions for their children. There are many ways to save and invest money wisely for your children. For example, what about putting some child benefit aside and investing it? The earlier you start saving, the better. If you invest €100 today and get an annual net yield of five percent, in a year you’ll have €105. If you don’t spend the additional five euros but reinvest it, it will contribute to an increased return the following year. This is the compound interest effect, which Albert Einstein called the “eighth wonder of the world”.
Here’s another example: A couple saves up all the child benefit (currently €204 per month) from their daughter’s birth. Their chosen investment strategy provides for an equity stake of 70 percent, with an expected return of 6.14 percent per year. For her 18th birthday, the daughter can look forward to the stately sum of almost €80,000 euros! (Taxes may apply.)
Financial education for children
Savings accounts are a thing of the past. The better long-term alternative is to invest in securities. In the long run, securities give you a good chance of attractive net yields — which is why parents should be encouraged to switch from classic savings to equity investing. Parents who want to invest in securities for their children can either invest a deposit in the child’s name, or do so in their own name and transfer the custody account at a later date.
It’s also crucial to get your kids on board with financial education. They need to know how to deal with money — for example through pocket money — and understand the different types of securities, so they aren’t intimidated by them later in life.
Strategic plan for your kids’ financial education
Fintech start-up FinMarie has developed a plan for parents to teach children from age 12 how to handle money.
Stage 1 — Financial goals
Set financial goals with your child and help her develop a financial plan to achieve those goals.
Stage 2 — Budget book
Keep a budget book of your expenses. Let your child help you file bills after you pay them. Good accounting is a learned habit.
Stage 3 — Practical experience
Let your child make a shopping list and go shopping alone. He should then write down what was spent on each meal. And importantly, let your child gain experience with cash — this helps to develop a sense of the magnitude of money.