Investing for Kids: How to Give Them the Financial Headstart You Never Had
Do you ever look at your savings or investments and wish that you started earlier?
While you can’t travel back in time to take full advantage of the magic of compound interest.
Did you know that you can do something today to give your children the financial headstart you never had?
Think about it.
If your parents had the foresight (and funds) to invest USD$10,000 in Apple stocks back when it first IPO-ed in 1980.
You would be sitting on a fortune that’s worth USD$6.7 million (approximately S$9 million) today.
Investing for kids.
It’s probably one of the biggest gifts you can gift your progeny.
Y’know, besides the gift of life — that is.
TL;DR: Investing Is For Kids Too
Getting your kids to invest when they’re young opens a dialogue about the basics of budgeting and investing.
- Start with a low-cost Regular Shares Saving Plan
- Start young and small to give them room to fail early and learn from their mistakes
- Involve them and let them gain hands-on experience by getting them to actually buy a stock, monitor its performance, and make decisions to trade or sell
- When picking stocks, start by choosing a relatable company that they know and love — it’s easier to sustain their interest
Most importantly, don’t just give them the world on a silver platter!
Impress upon them the importance of why and how financial literacy will help them to achieve success in life.
How Do I Start Investing for My Children?
Before we get into the finer details of how to start investing for your child or children’s futures.
You need to make sure that you have taken care of yourself before you even start investing for anyone else.
As a guide, this means that you’ve at least got everything listed in the Seedly Money Framework down pat.
Or to put it simply, you:
- are debt-free (or are working towards it)
- are properly covered with insurance
- are investing for your own retirement
- have emergency savings set aside for any unforeseen circumstances
Even the emergency safety cards onboard an aeroplane specifically instructs you to place the oxygen mask on yourself first before helping small children or others who may require your assistance.
Otherwise, it would be pretty ironic if you had to depend on your children in your retirement.
Start with a Regular Shares Savings Plan
For beginners starting to invest, you’ll probably want to look at a Regular Shares Savings (RSS) Plan.
An RSS Plan is a simple way for your child to start saving and investing with a small amount of money — from as low as S$50.
By making a monthly investment, your RSS Plan allows you to dollar-cost average your investment.
Meaning when the prices of a particular fund or stock that you’re buying are low, you’ll buy more.
And when prices are high, you’ll buy less.
But overall, the price you pay will ultimately be lower than taking a lump sum and buying the fund or stock at one go.
This is a pretty powerful concept to introduce to your kids at a young age as it impresses upon them the importance of investing for the long-term.
So Which RSS Plan Should I Choose for My Child?
If you want your child to keep a larger per cent of whatever they reap from the market, then it’s a good idea to pick an RSSP with the lowest fees possible.
A perfect example would be the FSMOne Regular Savings Plan which charges S$1 for investments of up to S$1,300.
If you would like your child to practice picking stocks, then you might want to consider an RSS Plan which has a wider selection of stock counters.
RSS Plans like PhillipCapital Share Builder Plan gives you access to five ETFs and 34 STI component stock counters.
And OCBC Blue Chip Investment Plan gives you access to three ETFs and 17 STI component stock counters.
Alternatively, if you and your child would prefer to grow your monies in a hands-off way…
Then the choice of which RSS Plan to go with will ultimately be informed by which ETF (Exchange Traded Fund) you want to invest in.
These funds usually track an index — like the STI (Strait Times Index) — and bring immediate diversification to the portfolio.
Arguably, they’re a good place for most beginner investors to start.
Note: not all RSS Plan offer the same pool of ETFs to choose from. For example, DBS Invest Saver only has four ETFs to choose from.
Are There Any Restrictions When Choosing A RSS Plan?
The age of your child would be the biggest problem.
But that doesn’t mean that you can’t set up an RSS Plan for them.
If your child is below 18 years old, you can simply set up a joint account with them via:
- FSMOne Regular Savings Plan
- OCBC Blue Chip Investment Plan
- PhillipCapital Share Builders Plan
Note: DBS Invest Saver does not have a joint account feature.
However, you can set up a plan using your joint-alternate Current or Savings account.
But the plan will be in your name only.
When your child is of age, you can then transfer the ownership of the investments to them instead.
The joint account will hold the funds required to fund your child’s investments.
Once the RSS Plan is set up, it’s an automated process that will deduct from this joint account monthly.
If you’re wondering how you should fund this joint account, you have two options:
- You can make monthly contributions out of your own pocket, OR
- You can get your child to make monthly contributions with their monthly allowance (or even their hongbao money)
As an added incentive, you can also suggest matching their contribution dollar-for-dollar.
The second option is probably better as it encourages them to budget and think about how they are spending their money.
Bonus: What If I Want to Open an Online Brokerage Account for My Child Instead?
If your child is above 18 years old, then it’s pretty straightforward.
All they have to do is follow this step-by-step guide on opening a CDP and brokerage account.
Now that they can open a CDP account online, this entire process will only take about 15 minutes.
If your child is below 18 years old, he or she cannot open a CDP account yet.
So if you wish to go with an online brokerage, you’ll probably have to use your own CDP account to make investments on your child’s behalf.
Technically, you’re just making more investments with your own online brokerage.
And holding whatever investments of theirs in your name.
Eventually, when he or she turns 18 and opens their own CDP account, you can apply for a Request for Transfer of Securities.
Note: the transfer fee is S$10.70 (inclusive of 7% GST) per security, per transfer.
Helping Your Kid Decide What to Invest In
Let’s say your kid starts with an STI ETF like Nikko AM STI ETF or SPDR STI ETF.
Well… You can:
- Make it a habit to sit down with them to study the market movement
- Introduce relevant content like our Investment articles — shameless plug here — to bolster their education
- Spark discussion on the constituent stocks that make up the funds which they’re investing in when checking on their earnings and losses
- Inspire them to be informed about the latest updates to the market
And as they watch their money grow, they’ll learn and refine their investment strategies.
Even if you choose to skip ETFs completely and go straight into individual stocks.
The four steps above still ring true.
When picking stocks, you can always start with household names which they recognise.
For example, telcos like Singtel (SGX: Z74) or Starhub (SGX: CC3) which provide the data they use for TikTok and Instagram (or whatever new-fangled app the kids are on these days).
The reason behind this is simple.
If kids can relate to the brands they know and love…
It makes it easier for them to be interested in what happens to these companies.
When Should I Transfer Ownership to My Children?
In Singapore at least, they’ll have to be 18 years old before your child can take over whatever investments you have done in his or her name — if you choose to do so, of course.
If you’ve successfully involved them in the investment process all this time, then this is when they can take over and continue investing for themselves.
Most importantly, the transfer of ownership should only be done if you’re confident that they are financially literate.
If they have internalised your approach to money, and understand the fundamentals of investing.
They’ll be busy thinking of ways to increase or grow their wealth.
While their peers are probably thinking of new ways to spend money.
So if you haven’t involved your children in any part of the saving and investment process, it’s probably best to start as soon as possible.
Even in the worst-case scenario where they take over the account and make terrible investment decisions.
They would have lost only a small amount of money and would have time to rebuild their capital and learn from their mistakes.
After all, we can’t exactly predict how the market will turn out, can we?
When Is the Right Time to Start Investing for My Children?
Right now actually.
Even if you don’t have any offspring running around yet, it’s never too late to start investing for your future.
Most importantly, investing for your kids is not only about what you’re giving them.
It’s about who they will eventually become.
It’s one thing to gift your children S$9 million worth of Apple shares.
But if they lack the financial maturity and wisdom of how to properly manage their wealth through hard work and responsibility.
And think that they can cruise through life without a job…
You’re just setting them up for failure.