When Your Child Gets Excited About Saving – How Should You Guide Them?

Guiding a child with investing

Before choosing where to put the money, it is worth talking with your child about what they are saving for.

A short-term goal

If they are saving for a shorter-term goal, for example a new phone or a PlayStation within the next 12 months, my suggestion for a younger child is a piggy bank or a jar where they can see and follow the money growing. For an older child, a savings account is of course an option; for example, Bank Norwegian pays 1.75% interest at the time of writing.

A long-term goal

My suggestion is equity index funds if they are saving for a long-term goal and the money is not needed for, say, 10 years or longer. Such goals could be buying a home as an adult, a financial buffer, financial independence, or saving for retirement.

You can find out more about how to do this in practice in my earlier post.

The power of compound interest

When you invest for the long term, compound interest can work wonders. Assuming a 9% return, an investment doubles in eight years. Over a longer period, for example 64 years, at a 9% return the investment grows 256-fold.

• 1,000 EUR invested at a 9% return is 2,000 EUR after 8 years
• 1,000 EUR invested at a 9% return is 256,000 EUR after 64 years, more than a quarter of a million

The examples above don’t account for inflation, and of course, after inflation a quarter of a million won’t buy as much in 64 years. It is still an astonishingly large amount, considering that only 0.4% of it is the original capital and 99.6% is return.

PS. I would like to find a way to teach children compound interest so clearly that it sticks with them and they understand its potential for themselves. Ideas are very welcome.