When Chase Schachenman was 16 years old, he figured out how to save less money over his lifetime – spend more money and end up richer. For most adults, that wouldn’t work. To build wealth, we need to spend less and save more. But that doesn’t apply to kids if they start investing early.
For several years, I taught high-school personal finance. I learned that kids are more likely to adopt something if it’s their idea.
If you would like your son or daughter to invest, start by asking questions.
I asked my students to consider two friends with part-time jobs: Jill and Lisa. Jill begins to invest $240 a month when she’s 16. She invests the same amount every month until she’s 65. I asked, “Over these 49 years, how much would Jill save?” It’s Grade 3 math: $240 per month x 12 months x 49 years = $141,120.
In contrast, Lisa starts saving $1,500 a month at the ancient age of 40. I asked how much she saves before turning 65. The answer: $450,000.
Then I asked, “If Jill and Lisa earn the same salaries, who can spend more of their income on fun things?” Everyone agrees. Jill can spend more because, overall, she saves a lot less.
I then asked my students to assume Jill and Lisa invested what they saved. They each averaged 8 per cent per year. Plenty of the students asked, “How would we average 8 per cent?”
I introduced several 25-year date ranges and asked, “How did stocks perform?” For U.S. stocks, they used the online calculator DQYDJ.com. They used the Stingy Investor Asset Mixer calculator for U.S. and Canadian markets.
Short-term, returns are often horrible. But investing isn’t a sprint. It’s a marathon. Over long periods, a diversified portfolio is far less risky. Consider the 25 years ending with the 2008 financial crisis. That was scary. U.S. stocks cratered 37 per cent in 2008: the biggest calendar-year decline since 1931. But U.S. and Canadian stocks averaged 10.2 per cent and 8.8 per cent annually, respectively (measured in Canadian dollars) ending Dec. 31, 2008. There’s nothing scary about that.
What about investing in January, 1929? Twenty-five years later, a lump-sum investment would have averaged 8.14 per cent, measured in U.S. dollars. If someone invested in January, 1931 (on the eve of history’s biggest single-year decline), they would have averaged 11.02 per cent over the next 25 years, measured in U.S. dollars.
At this point, I brought the story back to Jill and Lisa. I asked, “If they each invested what they saved, and if they averaged 8 per cent per year, how much would they have when they reach 65?”
Using a compound interest calculator, they learned Lisa would have about $1,421,179. But Jill, despite spending more while she worked (and saving less), would have about $1,718,310. When investing, time in the market is the ultimate superpower.
But don’t tell your kids. Instead, ask the right questions. That’s how to best make lessons stick. One year, almost 40 per cent of my students opened in-trust investment accounts.
Mr. Schachenman was one of them. Now 24 years old, the software engineer has been investing for eight years. “I’m glad I started early,” he says. “My money will work hard for me, so I don’t have to work as hard for money.”
Taylor Howe, 17, wants to do the same. The Grade 11 student works part-time at a restaurant in Courtenay, B.C. She invested $1,500 into a diversified portfolio of exchange-traded funds (ETFs) with CI Financial Corp. Every month, she adds another $100.
“My main motivation for this is to be lazy,” she says. “If I invest when I’m young, I won’t have to work so hard and I won’t have to worry about money.”
Her mother, Samantha White, is proud to see her daughter saving money. The account is in-trust for Taylor, so both Ms. White and her daughter’s names are on the account. Ownership reverts to Taylor when she turns 19. Ms. White’s two younger children, Sydney, 15, and Liam, 13, have in-trust accounts as well. Like Taylor, they have to earn their own money if they want to invest.
Parents could follow Ms. White’s lead with a robo-adviser like CI Direct Investing or WealthSimple. Such firms help with account openings and build and rebalance a portfolio of ETFs.
Parents who don’t mind a bit more work could open informal trusts with a brokerage and buy all-in-one portfolio ETFs. They might choose BMO’s Growth ETF (ZGRO). It contains about 80 per cent global and Canadian stocks, with about 20 per cent in bonds and a low management expense ratio (MER) of 0.20 per cent. Investors seeking a socially responsible solution might like the new, similarly allocated iShares ESG Growth ETF Portfolio (GGRO) with an MER of about 0.25 per cent.
My sister took the same investment route as Ms. White with her two sons when they were ages 7 and 9. They trickled their savings from delivering newspapers and working part-time jobs, putting the proceeds into Toronto-Dominion Bank’s e-Series index funds. Now 16 and 18, they have several thousand dollars each, in addition to the money their parents deposited into their registered education savings plans (RESPs).
“I don’t think many parents consider using an in-trust investment for their kids,” says David Dyck, head of client services at CI Direct. “When parents think about trust accounts, they’re more likely to think of an ultra-wealthy family setting up a trust fund instead of a typical family starting an investment with money saved from birthday gifts and allowance.”
One of the benefits of using an informal trust, Mr. Dyck says, is that it’s easy to get started. “There are no lawyers or additional trust agreements involved,” he says, and the contributing parent pays tax on investment income (dividends and interest), while the capital gains tax is attributed to the child.
Sometimes, when parents see the power of compound interest, they shovel their own money into accounts for their children. But Ms. White, a teacher and a business owner, doesn’t think that makes sense.
“I’ve added my own money to their RESP accounts,” she says. “But if I also gave them money for their in-trust accounts, my kids wouldn’t develop their own financial muscles. It would probably make them weak, denying them feelings of pride and accomplishment.”