Teaching Your Teens to Invest: Three Basics to Get Them Hooked!

Saving, and investing, are largely habitual behaviours. Which means they need to be formed when children are still impressionable. And wealth building is a more evolved attitude altogether. Unfortunately, most of us learn this difference only in our late twenties or early thirties, when we realize that living by the mantra of savings = earnings-expenditure is not going to take us very far.

Of course, in india, most children don't work summer jobs or side jobs while studying like they do abroad. Which means that they can either save from their allowances or start doing odd jobs at home to earn a bit extra. Although this may not mean a big enough amount in regular investments to begin with, it can still be enough to help form the right habits. Some parents even offer to match by 50 or 100% what the children save themselves, so the incentive to save is that much higher.

Let's look at three conversations you can have with your 'young adults' to equip them with constructive and positive money habits at the right time.

The Power of Compounding

Not just kids, learning about compounding is a fascinating exercise for most adults as well! for example, did you know that even a 5-year difference in the period of investing can make a difference of crores to your retirement fund? Here's how:

Amount invested: Rs. 5000/month

Bank Recurring Deposit Rate of Interest: 8% per annum

Mutual Fund Systematic Investment Plan (SIP) Rate of Return: 12% per annum

Now, let's assume your child starts saving at age 15, with rs. 1000 every month. If you get them to invest in an equity mutual fund sip, by the time they are 25 they would have accumulated Rs. 2,35,855 at 12% returns. At this point, they would most likely have a job and would be able to start saving more - say Rs. 5000 a month.

When we add this corpus (rounded off to Rs. 240,000) to the principal in the above example, here's how much the numbers change:

Amazing, right? Compounding is thus not only fun, but probably the most powerful way to teach your children about wealth accumulation.

Risk and Return

This example is also a great way to explain to them about different investment options like bank deposits or mutual funds, and why they offer such different returns. Help them understand that in investing, risk means the possibility of losing some or all of their money, and that riskier investments offer greater returns than safer bets. These fundamental concepts will play an important role in their decision making as they go on.

Talk to them about different investment products like stocks, bonds, mutual funds, bank deposits and even providend fund accounts to give them a good initial understanding of when each option would be most appropriate. in most cases, your teen would probably be the most excited by stocks and the promise of exponential returns. Tell them about the concept of risk adjusted returns, which is essentially assessing whether the returns on a particular investment are worth the risk we're taking. While it is a technical calculation that most of us would never make ourselves, it is an important concept that teaches us to assess risk and return together - and not just the potential returns.

Long Term Investing

Fact 1: Teenage investors, with over 50 years of compounding ahead of them, have the greatest advantage of time. Even if they cannot invest huge amounts of money. And even if they cannot make glamorous bets on high growth stocks.

Fact 2: Almost all markets have moved upwards over the long term.

Which means that all your teenager needs to do to accumulate wealth is to make a few sensible initial investments, and stick with them through short term market swings without giving in to fear or temptation. The following chart of the bse sensex over the last 30 years should help drive home this point:

Source: Bloomberg,iFAST Compilations

The low points in 2008 and 2016 should help illustrate the fact that investors who stuck to the course despite making losses would go on to not only recover, but increase their wealth in multiples.

Conclusion

On average, our children are studying more and starting off with higher paying jobs than we did. They also face family responsibilities later than we did. This means they have a real opportunity to start creating wealth as soon as they start earning. So even as they dream of annual backpacking trips across europe and new zealand with their friends, it's only deeply ingrained habits of saving and investing that will keep them from spending away their precious all!

Disclaimer

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