3 ways to start an investing conversation with kids

Written and accurate as at: 5 July 2022

Most parents would agree that children are notoriously bad at delaying gratification—and truthfully, many adults aren’t so good at it either.

Research suggests, however, that children who are long-delayers go on to be more successful later in life*, which could come in handy, given the rising cost of living.

As a parent, introducing younger and older kids to life-changing skills such as investing and building long-term wealth, can be a great bonding exercise.

But there is also a very practical reason for laying the foundations early; with an ageing population and less taxpayers to fund government spending in future, younger Australians are likely to bear the brunt of a dwindling financial safety net#. Already today, the Age Pension only covers around a third of what is considered a comfortable lifestyle in retirement^. Fast forward a few decades and our kids may well need to self-fund their retirement.

Luckily, many young Australians do have an interest in super, and are looking to prioritise their financial health early on in life. According to one research report*#, 54 per cent of surveyed Gen Z respondents (born 1995-2009) check the balance of their superannuation account at least once a month.

This compares to 42 per cent for Gen Y (born 1980-1994), 33 per cent for Gen X (born 1965-1979), and 31 per cent for baby boomers. While we can’t predict just how engaged our youngest household members (Gen Alpha – born 2010-2024) will be with their super, there is a clear and positive trend of younger generations becoming more engaged with money early on.

Getting the conversation started

Conversations about investing to build long term wealth can be a useful vehicle to teach some fundamentals, such as the importance of diversification, the magic of compounding interest and why you should only ever invest what you can afford to lose. But often starting the conversation is the hardest part. Here are some ideas about how to make conversations about investing and long-term wealth creation meaningful, and relevant, to kids:

Idea #1: Focus on how money choices can make an impact

As humans, we are very driven by what is most important to us. For many young Australians, sustainability has become a big factor in day-to-day decision making. According to research*^, generally Gen Zs (born 1995-2009) believe in protecting the planet through their purchasing decisions, with many taking steps to change their behaviour because of concerns they have for the environment. This trend only continues in Gen Alpha (born 2010-2024), for whom making sustainable choices has almost become a way of life.#*

From bank accounts, to super funds and investments, educating kids on how their money choices can make a positive difference to our planet and people can be an empowering conversation to have. When it comes to investing, explaining the basics of environmental, social and governance (ESG) investing, and how investors can decide which funds and/or companies they invest in, might be just enough to pique their interest.

Idea #2: Use technology as a learning tool

Whether we like it or not, kids growing up today are digital natives—even classrooms are becoming increasingly digital, with the use of tablets and apps as common learning tools. Imparting wisdom via already familiar technology could be a way to keep kids engaged.

A micro-investing app, for example, could be a good place to start for older kids. Micro investing uses only small amounts of money to invest spare change from purchases into exchange traded funds (ETFs) made up of shares, bonds, or a combination of the two. The funds are managed for you, and generally offer some in-built diversification to help spread risk. Some may also offer socially responsible options to choose from.

Micro investing can be an opportunity to teach kids two important lessons; using pocket money wisely, and how small invested increments can accumulate over time. There are, of course, many other options available on the market, such as share trading accounts specifically designed for kids, if you prefer to invest directly in shares rather than through a fund. Whichever platform or app you decide to try, it’s important to make sure you understand, among other things, the fees you’ll be charged—on a monthly basis and/or per trade.

Idea #3: Explain how dividends can provide a passive income

The idea of making money without working can be a powerful concept to a child. Explaining the concept of dividends, and how some investments can pay dividends in the form of cash, may spark some interest.

The dividend conversation is also an opportunity to explain some of the everyday choices we have in life, and the trade off that comes with instant gratification (ie spending dividends) vs delaying rewards until later (ie reinvesting dividends through the purchase of additional shares). To demonstrate the point, you could use a real-life scenario using something your child is saving for. For example, by delaying gratification, they might be able to buy more than what they could have.

These simple lessons all add up and can provide your kids with a better understanding of financial concepts that could make a difference for them, both today and in the future.

Things to consider

If you’re planning to go beyond a conversation and actually open an account for your child, there are some restrictions to consider. For example, one must be aged 18 or older to buy and sell shares in Australia—therefore, some parents choose to open an account on their child’s behalf, under their child’s name. This means the investments are owned by the child, but they won’t be able to access the investments until they turn 18. 

There are also tax implications if the earnings on the account exceed $416 per financial year. Additionally, once earnings reach this amount, you must lodge a tax return on their behalf. To find out more about these tax implications, please visit the ATO website.

While teaching kids about investing and building long-term wealth can be an exciting and fulfilling endeavour, please consider parental supervision of any investing activity, up until the age of 18 years old. If you would like to talk to us about investing for your kids, get in touch today.

#Grattan Institute Generation Gap Report, Ensuring a fair go for younger Australians, August 2019
^Griffith University Report, Intergenerational Wealth Transfer: The Opportunity of Gen X & Y in Australia (2017)
*#McCrindle Strategic Insights Report 2021, Australia towards 2031