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Basic principles of investing for kids
Before you start setting up your children’s first investments, there are some financial basics they’ll need to understand.
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The value of investments can fall as well as rise, and you may not get back the full amount you invest. Eligibility criteria, fees and charges apply.
Risk and reward
One of the first steps is to educate them on the relationship between risk and reward. They might have heard the phrase ‘the higher the risk, the higher the possible return’. But it’s a good idea to break this down – as it’s not as black and white as it seems.
Explain that while investments can make people money, they’re not guaranteed to go up. That means they can lose money too.
So, the potential rewards aren’t the only thing to focus on. They need to be balanced against the risks and possible losses.
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Responsible saving
If they want to start investing, introduce the idea of managing their own savings account.
Saving is a low-risk way to build money that guarantees a return, due to the associated interest. The ‘risk versus return’ comparison here would be – the longer you leave your money in your savings account, the more it gains interest, and the more it can grow.
Savings accounts carry low risk. So, they may be a useful starting point when looking for the best investment accounts for kids. The NatWest First Saver account does what it says. It’s a savings account for kids under the age of 16.
You can open a First Saver in trust for your child and start saving cash with them. The NatWest mobile app can help you to manage savings together. For example, you can keep track of their nest egg and see how much interest they’ve earned.
To open a First Saver account you must be 18+ and opening the account in trust for a child under 16. Both you and the child need to reside in the UK, and you need to have a NatWest current account. Interest is calculated daily and paid monthly.
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Prioritising their spending
Teaching kids what to spend and when is important. Being able to prioritise is a key skill to understand when learning the art of responsible saving and investing. Managing pocket money can be a useful introduction.
By giving them a set amount of money per week or month, it’s up to them how they prioritise their funds. They might jump straight in and spend all their money right away – but it’s all part of the process. The best way to learn is by making mistakes and, soon, they’ll learn the basics of budgeting.
If you feel they’re ready, you could consider opening a pre-paid pocket money card for them. For example, our Rooster Card is a child-friendly debit account that helps your kids build healthy spending habits. Track their money on the Rooster Money app, and teach them more about the value of sensible saving.
To be eligible for the free Rooster Card subscription offer you must be a NatWest bank customer, over 18, a UK resident, registered for either Mobile Banking or Online Banking with kids aged between 6 and 17. Offer includes up to three cards. Some card designs may incur a fee. Card designs subject to availability. Other fees may apply. T&Cs apply (PDF, 100KB).
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Stocks
Start by defining stocks in simpler terms. For example, they’re shares of a company owned by people looking to make money out of that company’s market value. Give some background into the stock market, explaining that it’s a place where people buy and sell stocks and shares.
Stocks might be classified as high-risk because they offer the potential for higher returns or losses. Because of this, it’s a good idea to highlight that they’re often unpredictable. Their value can go up or down depending on changes in the market.
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Bonds
Bonds can be quite tricky to get your head around, especially if you’re new to investing. In this case, it might be a good idea to create a more playful scenario for your kids to explain how bonds work.
As an example, say a scientist wants to fund a major new project. They need a lot of money, so they can’t borrow it all from the bank. Instead, they ask if they can borrow little bits of money from lots of different people.
As an incentive, they tell people that, for every £100 they lend them, they’ll give them an extra amount of money each year – decided by an agreed interest rate. By borrowing money from different people, the scientist will have enough for their project, and that £100 grows over the years due to the agreed interest.
This action of people lending money in return for interest mirrors the buying of company bonds. They might offer an investment starting point for you and your children. But you’ll need to stay aware of investment risks.
The value of investments can fall as well as rise, and you may not get back the full amount you invest.
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Junior ISAs
As a first step into the stock market, a Stocks and Shares Junior ISA is as an investment account for parents of kids 14 and under. The money saved in the ISA belongs to your child and can’t be withdrawn until they turn 18.
It allows you to save for and with your child, and get into the habit of investing little and often. It’s also a way to introduce your kids to investment basics and show them how their investments could fluctuate.
At NatWest, you can choose from five ready-made funds, depending on the type of investor you are, and how much experience you have. These fund types range from defensive to adventurous, so you can take different strategies.
The NatWest Invest Junior ISA is a Stocks and Shares Junior ISA. The value of investments can fall as well as rise, and you may not get back the full amount you invest. Eligibility criteria, fees and charges apply.
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Making investing relatable for kids
Sometimes, complex ideas need to be made relatable to be understood. One of the best ways to help kids wrap their heads around saving and investing is by making these concepts entertaining.
Create children’s games around investing
Often, investing might not appear very gratifying for your kids. They might not immediately see the value in it when waiting long periods for potential returns. In the mind of a child, if they’re not getting money right away, what’s the point?
To keep them engaged, you may need to incentivise their saving by turning it into a game with more material rewards. For example, you could create competitions that reward whoever’s investments make the most money with prizes. Or, reward them for every month they leave their savings pot untouched.
Benefits of investing early for kids
Of course, saving money for your child’s future is the main benefit of investing early. Building up a pot or portfolio early could prove valuable in the long term, with different products to suit different risk appetites.
Besides the monetary value, learning the basics of saving and investing early can also be personally valuable. These concepts are applicable and useful in other areas of life – whether that be financial or social.
Teaching patience
Patience is a skill we all have to learn, and it can be very difficult when you’re younger. The act of waiting for a reward that might not come is frustrating – but investing could help this feel a little more manageable.
Putting savings away or investing in a Junior ISA can happen quietly in the background. You can regularly revisit their pot to illustrate the value of their patience.
The NatWest Invest Junior ISA is a Stocks and Shares Junior ISA. The value of investments can fall as well as rise, and you may not get back the full amount you invest. Eligibility criteria, fees and charges apply.