Saturday, April 13, 2024

How to start investing for your child and make them future millionaire

The majority of parents desire to secure their child’s financial future so that they have a head start in life. One of the best ways to do this is to create an investment portfolio for them, and to teach them how to handle money so that they don’t squander an investment that has taken years to build up.

If you start now, chances are high that your five year old child could be a millionaire by the time they turn 18 or 20. How do you do this? How do you start investing for your child to make them a future millionaire?

The 72 per cent rule

This is a rule that measures how long your child’s investment will take to double up. According to Robert Ochieng, an investment advisor and the founder of Abojani Investments, this rule is one of the most effective ways to invest for children.

This rule will require you to take 72 and divide it by the compounded interest rates return from an investment. The result will give you the time it will take for it to double earnings. “If an investment scheme promises an 8 per cent annual compounded rate of return, it will take about 9 years to double the invested money (72/8=9),” he says.

“For example, if you save money for your child in a money market fund that gives 9 per cent interest per year, then it’ll mean that Sh. 500,000 will be Sh. 1 million in 8 years and Sh. 2 million in 16 years.”

Treasury bonds and shares

These are some of the long term investment products you can consider. According to Ochieng’ if you invest Sh. 250,000 for your one-year old child in bonds going at 13 per cent interest per annum, your child’s investment will be worth over Sh. 737,000 by the time they hit age 15.

If you reinvest and compound the interests, they will be a millionaire before age 18. “You can also diversify your child’s portfolio from bonds and take a long term approach with shares. This should include reinvestment of dividends and periodic investment top ups. Equity and I&M are two of the stocks that have long term growth potential,” says Ochieng.

Unit trusts               

Mutual Funds or Unit Trusts – also called the Collective Investment Vehicles (CIVs) are best for parents who want to invest in their children’s long-term plans. They pool together from various investors and manage their money. They have a separate identification of savings and are not joined with a parents’ income.

“There are a host of mutual funds to choose from, and you will need to identify the bouquet that comes with a combination of debt and equity investments,” says Paul Muhami, a financial management and investment advisor, and managing director of Nairobi Success Academy. In addition, you should also use systematic investment options that also save on entry costs.

“There are investments that will enable you to divide how much you wish to invest for your child and for how long. Then there are those that will only allow you to invest for only a minimum of five years,” he says. If you are planning to invest for your child’s university education, it is wise to go for a package that comes with a minimum number of years.

The amount you can start to invest with will vary from one scheme to the other. For example, there are unit schemes that will allow you to invest for your child in unit trusts from as little as Sh. 100. There are others that have set the minimum you can invest at Sh. 5,000 with minimum additional investments of Sh. 1,000.

Dedicated children trusts often tend to be less expensive than the general ones. Examples of unit trusts include Old Mutual Unit Trust Scheme, Africa Alliance Kenya Unit Trust Scheme, British American Unit Trust Scheme, Stanbic Unit Trust Scheme, and ICEA Unit Trust Scheme.

Education and life insurance

You can get an education plan that will secure your child’s academic future. The majority of education policies mature after ten years.

For example, if you start saving through an education plan today, in ten years, you will not bother about fees. There are plans that cover local schools and curriculum and plans that will take your child to international GCE schools, either locally or abroad, depending on the amount of money you choose to pay.

Monthly premiums for the majority of max plans start at Sh. 10,000. Not all educational policies are flexible. Find out what may happen if you fail to pay your premiums on time, lest you lose your investment. “Education policy comes with some life insurance benefits. For example, if the policy owner (parent) dies, the child will still have access to the full benefits of the fund,” says personal finance coach Harrison Geita.

This policy works best where started shortly after child birth and, or as early as possible. With life insurance, though, you will need to know the type of policy to take.

“Term insurance will cover you for a period of 10, 20, or 30 years. If death occurs within this period, your beneficiaries (children) will get paid. If you outlive the policy, no payment will be made,” says Geita.

“Endowment package on the other hand will pay if you die, if you outlive the policy, and in some cases periodically on accumulated benefits within the policy term.”

The junior bank accounts

When teaching your child how to save and invest, opening a savings account in a bank or Sacco is a good way to start. In most cases, child bank accounts offer piggy banks where kids save their little earnings and monetary gifts at home.

Depending on how much comes your child’s way, you may either decide to be visiting the bank every fortnight to make a deposit or after the piggy bank is full. Either way, says Ochieng, always visit the bank or Sacco together.

“It is important for the child to be introduced to financial systems and how they operate. Keep a record of the deposits, interests, and dividends earned depending on the type of account and financial institution,” says Ochieng.

Former teacher making millions from onions, vegetables and livestock farming

These records are a good way to show your child how their savings are growing. You can set targets for the basic child equipment they need. For example, you can use a bike as a target example for their savings. This account could also be a custodial account that you will hand over to them once they turn 18.

Payable and non-payable chores

Divide house chores into categories that will teach your child the essence of team work and contribution, and remuneration. Ochieng says that on one hand, you should have non-negotiable house chores that will not be paid for.

These include tidying their room and doing simple house chores such as keeping the house neat. “This is to teach them that doing basic house chores is part of family team work of improving the living standards of the family,” he says.

Then have some chores that can be paid for. These may include watering flower beds around the house. “Instead of paying actual cash, have a plan where a chunk of the money they would have been paid is saved and invested. This will start teaching them that earnings are not spent wholly but invested,” he says.

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