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At what age should you start encouraging your kids to begin investing a slice of their birthday money?

A study carried out by Cambridge University concluded that by the age of seven, the majority of young children are able to understand the basic value of money.

It also found that little ones can understand the concept of delaying gratification and the fact that they cannot go back on certain decisions, which can create problems in later life.

Giving your children gifts of birthday money can set them on the right road towards developing a healthy attitude towards saving and investing for their futures if you know how best to approach it. It can benefit them substantially in later life.

Put in the right savings vehicle, this money can accrue significantly over time, and it’s a great way of getting your little ones into the saving habit.

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The joy and value that gifted money offers your children

Kids will naturally want to spend any money they are given. It’s quite natural. But in order to encourage them as regards investing birthday money, you first need to teach them about the concept of delayed gratification.

Start in small ways, encouraging them to save for something they really want. Make it things of little value to begin with, so the delay in the gratification and the joy they will feel when they can afford to buy it with the money they’ve saved will be even greater.

Explaining the investment basics to kids

Getting the psychology right is key, and there are plenty of ways of going about it. There are some great board games you can buy that help to make learning about money and saving fun.

Games like Cheeky Monkeys, Money Match Café, and Pop to the Shops. There are also specialist websites that have been created for parents and carers to assist with teaching your kids about money and saving.

It’s vital when teaching kids about money to make the topic engaging and. You can liken the process of growing a child’s savings to that of growing a tree or a plant from a seed.

Explain how the application of interest is like watering, nourishing, and fertilising a plant, helping it remain healthy and grow.  

Encouraging saving is a great start, but it is through regular, long-term investing that significant sums of money can be grown.

Children’s savings accounts are fine for short-term, easy-access savings, but because they typically offer less interest than children’s investment vehicles, it means they grow more slowly and are more susceptible to erosion through inflation.

However, you also need to be aware that investing money carries a certain degree of risk. In essence, the bigger the reward, the higher the risk.

Children’s Trust Funds were the go-to investment vehicles for kids, but they have been replaced by ISAs, with the best ISA for kids being the Junior ISA or JISA for short.

The role and responsibilities of the parent or legal guardian

The most important part of the role of any parent or legal guardian is to make sure that your children grow up to be happy, healthy and be fully prepared for adult life, and financial literacy for kids is an important part of that process. 

There are no legal obligations when it comes to starting investing money for your children, but there are moral and ethical principles.

The money is theirs and should remain so, and it ought to be invested in a way that is reasonably safe, and that will grow in terms of real value. 

Once you’ve chosen an appropriate vehicle and made contributions to, say, a JISA, for example, only the child can access the money, and only when that child turns 18.

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Starting a child-friendly investment plan

The sooner you are able to start investing for your children, the better. The longer the invested funds have to grow, the more they could be worth in years to come. It’s why some parents begin when the child is born.

Two of the most popular investment vehicles are NS&I Premium Bonds for Children and Junior ISAs.

Strictly speaking, Premium Bonds are not investments because they do not earn interest. Instead, the bondholder (in this case, the child) gets the chance to win prize money every month.

JISAs, on the other hand, do pay interest. There are two variants of JISA – Cash, or Stocks and Shares. The cash variety pays lower interest than the stocks and shares option, but the cash ISA is lower risk than its stocks and shares cousin.

Anyone, including parents, legal guardians, grandparents, other relatives, and friends, can buy Premium Bonds for children online.

JISAs can only be opened by parents or legal guardians, and these, too, can be easily opened online by visiting financial adviser.

Celebrate investment milestones to encourage further progress.

Teaching kids about money and encouraging investing birthday money are important components of parenting.

You can draw from your own experiences by showing your kids how you create your budgets, how you stick to them and how you go about managing, saving and investing your own money.

Lead by example and remember – celebrate your children’s financial milestones – things like:

  • When your child buys something with their own money
  • When your child creates their first budget
  • When your child first stays within budget
  • When they first earn their own money
  • When the first savings and investment account is opened
  • Each time an investment shows growth

Whatever the achievement, celebrate it. Buy the child an ice cream, take them to the cinema, go out for a family meal. However you celebrate, it will help your child to appreciate the value of the milestone and encourage progress towards the next.

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