The earlier you start having financial discussions with your children, the more likely it is that they will be successful when it comes to investing their own money. Here are five basic criteria for successful investing you may wish to discuss with your children.
Saving is for the short term; investing is for the long term. Setting money aside every month for unexpected expenses is a good start. As the last few months have taught us, having an emergency fund is essential. This money should be kept in a way that it is easily accessible, like a savings account or a money market fund.
However, if you want to save for bigger long-term goals you would need to give your investments enough time to grow; therefore, you need to invest in something that
can generate a higher return than cash or money markets over the long term.
Time is the secret ingredient when it comes to growing wealth. The longer the time horizon, the greater your investments will benefit from the miracle of compounding – interest earning interest. The key is not to be tempted to access your money. If you plan to invest for a certain period of time, always try to stick to your plan.
Invest in the right things for the right reason. You should have some investments you can access in the event of an emergency, some for special goals such as a car or education and other investments to make sure that when you retire one day, you will have enough money on which to survive. How you invest is critical, because you need to make sure that your investments grow faster than inflation.
There are many asset classes in which you can invest your money. There are four basic type of asset class: cash, bonds, property and equities. The least risky way of investing is in cash, but it usually delivers the lowest return over the long-term. The best way to build wealth over the long-term is to invest in shares – also known as equities. These are like owning a part of a company.
Equities are the riskiest asset class because their share price moves up and down all the time. A great way to own shares is to invest in a unit trust. It is sensible to invest in a balanced portfolio, which means you combine all the asset classes to get the best of all worlds – more return for less risk.
Lastly, choose your investments with care. While each type of investment has its place,
unfortunately not all investment professionals are to be trusted. Some may be outright dishonest; others may be incompetent. Be especially careful when someone promises you fantastic returns in a short space of time. Remember that if it seems too good to be true, it probably is!
An experienced Certified Financial Planner® will be able to help you and your children to identify suitable investments and assist you to invest your money wisely.
Rands and Sense is a monthly column, written by
Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth.
His Financial Planning Office number is 046 622 2891