Gifting a stock won’t make you the most popular person at the birthday party, but there is a happy medium.carlosbezz/iStockPhoto / Getty Images
Warren Buffett is one of the best-known investors in the world, with an estimated net worth of around US$140-billion.
Much of his success can be attributed to a secret weapon of money management: time. The longer compound interest can work its magic, and the longer assets have to appreciate, the better.
Mr. Buffett bought his first stocks at the age of 11, and made his first real estate investment at 14. He’s now 94 and he’s had more than eight decades to grow his portfolio. In a 1988 Berkshire Hathaway shareholder letter, he famously said, “Our favorite holding period is forever.”
As a parent, I’ve been thinking about the power of time when it comes to setting our kids up for financial success. I wish my mom had made me invest or save a portion of my Loblaws cashier paycheque in 2000. (To be fair, even if she had tried, would teenage me have listened?)
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At ages 1 and 3, my toddlers clearly don’t have paying jobs, but they do receive gifts on holidays such as Christmas and their approaching birthdays – which is why gifting is on my mind this summer.
Our kids have four sets of grandparents, several aunts and uncles, and lots of daycare friends, so they get absolutely spoiled with toys, clothes and other gifts. While we’re always grateful, it can feel like too much: too many toys, too much consumption, too many things to store in our basement.
They do on occasion receive cash from grandparents or other relatives, and I have a rule that I take that cash and invest it in their education savings account. This means that along with our monthly contribution, we’re adding anywhere from $500 to $1,000 every year to their RESP.
But it’s not the $500 today that’s powerful – it’s the 15 years that money has to appreciate that will be truly powerful when they’re ready to head off to university.
Even with minimal monthly contributions, our RESP is expected to have $121,000 in it by the time our girls are 18, more than enough to cover an AI prompt engineer course (my guess at the hot career of 2040).
This approach to investing was inspired by a colleague. He gave his nephew the option of a gift card to spend on whatever he wanted, or to invest the gift money instead; his nephew chose to invest the money.
On special occasions such as birthdays, he and his wife invested the money they would have given him in an exchange-traded fund made up of top technology company stocks. In addition to investing the money, they took the opportunity to use portfolio updates as a teachable moment about investing – for example, explaining what an ETF is, how stocks appreciate over time and how to ignore short-term volatility.
In an e-mail to his nephew outlining how his stocks had grown 60 per cent in a span of three years (and outlining how those returns were unusual), he wrote: “Start young. Save and invest, even if it’s only a little bit, consistently over time, and that money will grow. Every dollar that you can save and invest today will one day be worth hundreds.”
While gifting a stock may not make you the most popular person at the birthday party, there can be a happy medium – maybe it’s a Barbie and $50 for their RESP, or a small amount of money in an ETF.
After all, as soon as my kids are old enough to really understand that Grandma’s cash gift can buy them new Paw Patrol toys, they’ll be gunning to keep that $20 bill, which is why my goal is to get my family on board with my long-term savings goals for the kids.
As we approach this year’s gifting season, I’m keeping my colleague’s advice in mind, both for my kids and any I buy gifts for. If you’re a friend or family member reading this, we always appreciate things, but the gift of investment time horizon is more powerful than a Barbie.
To my own niece and nephew, I will probably be the uncool aunt who gives you stocks, and drones on about the power of compound interest at your 12th birthday party – but you’ll think I’m pretty cool when I hand you a cheque for thousands when you turn 18.
While I can’t guarantee a Buffett-sized net worth, I can guarantee that I’ll let time work its magic for my kids – maybe they’ll thank me when they’re Mr. Buffett’s age.
Erin Bury is the co-founder and CEO of online estate planning platform Willful.co. She lives in rural Ontario with her husband and two young children.