How could you make your child a millionaire? Photo / Getty
How could you potentially make your child a millionaire by the time they retire?
Thanks to the magic of compound growth, a birthday lump sum deposit of $2040 when a child is born could become a potential nest egg of $1 million by the time they are 65.
That is if the historical average United States sharemarket growth rate of 10 per cent each year continued.
Bay of Plenty investment experts say more parents are opening accounts for their children to give them a head start in reaching financial freedom at retirement age.
KiwiWealth's digital investment platform Hatch launched its own Kids Investment Accounts this month following strong demand and nearly 2000 accounts had already been opened.
Hatch co-founder and general manager Kristen Lunman said in contrast, placing a similar one-off payment in a child's savings account would see a fraction of that return.
At current interest rates of 1 per cent, Lunman said $2040 deposited into a savings account today, would reach just $3900 over 65 years.
Lunman said investments in US sharemarkets had shown a historical average growth rate of 10 per cent each year, meaning that same deposit could snowball to $1m in the same period assuming the same average growth rate continued.
"Your money will certainly be working for you in a sharemarket as opposed to being in a savings account in the bank."
Lunman said there was no way to predict the sharemarket would continue to grow at the same rate but over time sharemarket highs tend to outweigh the lows.
"We are going to see bumpy years like if another pandemic or Global Financial Crisis hits but businesses, which is what the share market is made up of, are always looking to grow and improve.
"Their mandate to shareholders is to be better and more efficient. We know businesses are going to continually grow therefore their value is going to continue to go up.
"Those that don't get dumped off the sharemarket."
Being financially literate was a "gamechanger" and compound interest should be at the forefront of financial education for Kiwi kids, Lunman said.
"Financial literacy could help teach our kids the foundations of how to grow long-term sustainable wealth. Indicators are that if this is not learned at a young age, it may never form at a high level.
"The spillover is that our next generation of Kiwi parents will repeat what their parents did and miss out on serious opportunities for growing their wealth and taking control of their financial future. Over time this will hurt Aotearoa New Zealand's collective wealth as a nation."
Through Hatch, parents can invest on behalf of their children and, as they grow up, they can introduce them to their accounts and the concepts of long-term investing.
For parents who are also new investors, it was an opportunity to learn alongside their kids, Lunman said.
"We want to generate conversations and actions to help parents by using small sums to demonstrate solid investment principles and build lifelong investment habits for their kids."
Lunman acknowledged getting children excited about financial concepts was tricky and suggested talking about the companies they love was a good start to learning about money and investing.
"With fractional investing, kids can buy shares in their favourite brands for less than the price of the products they sell and can see how investments can grow over time. That's powerful."
Head of Private Wealth Research at Craigs Investment Partners, Mark Lister, said it was impossible to predict what markets will do.
However, historically US and NZ share markets have delivered about 4 per cent above the inflation rate so an average 10 per cent growth per year was as good of an approximate as any.
That premium or "real return" has been quite consistent through time.
Lister said Craigs Investment offered mySTART, which was a great introduction to investing and saving and the option to open accounts for children.
"A lot of our clients do open these types of accounts for their children or grandchildren.
"Anecdotally more and more of our clients, which tend to be grown-ups, are thinking about trying to involve their children so they can understand financial literacy."
Lister said investment education was "more important than the actual dollars and cents" but financial literacy did not come naturally to Kiwis.
"We've never really been good at saving and investing but I'm hopeful that over the course of a generation that will change.
"The KiwiSaver generation will understand it much better than previous generations."
Hobson Wealth investment adviser Roger White said sharemarkets have delivered returns ranging 10 per cent per annum for the last 100 years.
But White said returns were never guaranteed and events including the GFC and Covid-19 had certainly tested investors' comfort levels.
"Children have the benefit of a long-term investment time-frame, which means they can weather the ups and downs of the markets."
White said Kiwis had low financial literacy so the sooner children learn the better.
"If they are invested early in their lives they will be more engaged and the education will follow.
"Teenagers are often tempted with offers of easy credit to purchase the things that they want, so it is vital they also learn good money habits early to avoid the pitfalls of overcommitting themselves, particularly with costly credit.
"Saving up to achieve a goal is a good way to overcome this, and where it is a very long-term goal, then investing in the right strategy will help to get there faster."
White said there "most definitely" had been a lift in parents wanting to open kids' investment accounts.
"Interest rates for deposits are at historic lows so there is strong demand to seek advice on generating more meaningful returns to help children strive for home ownership," he said.
"Striving for a goal of $1m is certainly a fantastic start for any child in their investment journey."
Forsyth Barr investment adviser Paul O'Driscoll said close to $1m can be achieved with an average 10 per cent annual growth rate but 5 or 8 per cent was more realistic.
O'Driscoll said if a parent invested $1000 each year from when their child was born for 65 years they would get a $456,000 return at a 5 to 8 per cent growth rate.
He said financial literacy was key to long-term financial wealth and driving investment behaviour, and there had definitely been a jump in parents wanting to open accounts for their children.
"A really important part of it is having comfort with financial investment. It enables society to build greater wealth in the long run.
"KiwiSaver has really helped parents become more comfortable with how financial investments can provide value in the long term."
Personal finance lead at Sorted, Tom Hartmann, agreed while the sharemarket can grow at an annual rate of 10 per cent or higher, a real return of about 5.5 per cent was more realistic.
He said a parent would need to invest $33 a week or a lump $31,000 deposit to make $1m in 65 years at 5.5 per cent.
"But remember $1m in 65 years can't buy what $1m can today."
Hartmann said financial capability was an essential life skill.
"Almost everybody has to manage their money as they get older."
Well-known Kiwi's court move over story; Which political leader is best/worst with media?