If you have a child with an 18th birthday on the horizon, you may already be contemplating what to buy them for their birthday.

Eighteen marks the end of childhood and in theory the end of dependence on you. Your 18 year-old could be planning to leave home and head off to travel or study. While most school leavers tend to stay in the family home until they are nearly 24 years of age, your child is now entering an entirely new phase of education that has nothing to do with book learning.  

This ‘school of commonsense’ means they will now be held to an adult standard when it comes to performance on a job, entering contracts such as a lease, purchasing a car, being responsible for utility bills, insurance and medical expenses. One of the key areas of learning is managing their personal finances and one of the best gifts you can give them on their 18th birthday is the gift of compound interest.

Imagine if you started your child off with a $1,000 worth of shares in a managed share fund. If they kept reinvesting the returns and making regular contributions for another ten or twenty years, they would have a sizeable deposit for their first home; could pay for their degree; or have the means to deal with a number of financial challenges. They would also have learned the value of compound interest.   As an example, starting with $1000 at 18 years of age and adding $250 per fortnight would give them over $100,000 even at a very conservative 4% per annum return.

The key element when it comes to compound interest is time. Resisting temptation and leaving an investment for as long as possible will allow it to grow and for them to reap the rewards. An 18-year-old has nearly 50 years of income generation ahead of them, giving them the ability to invest and hold on to this investment for decades.

Unfortunately, people always seem to have an excuse not to invest – the market’s not right, inflation is too high, they’re saving to travel, they’re planning a wedding and many more reasons why now isn’t the right time. Teaching your child to see the long-term is teaching them about wealth creation regardless of what career they ultimately choose or income they have. You are helping them to learn that small amounts invested consistently over time will unlock their financial independence.  

call to action2