Where to invest your child's money

Where should you invest your child's money? Say, their first $1000 savings?

Money reader Brian opened two accounts for his 15-year-old daughter, Alex, when she started part-time work at a fast food outlet.

One was a savings account that she couldn't touch and the other could be accessed easily with a debit card.

"Every payday I transfer exactly half of her wage into her own account," says Brian. "It is up to her what she does with this money and it gets spent very quickly on clothes and phone credit. The other half of her wage stays in the other account so really I am forcing her to save half.

"When her savings account hit $500 it dawned on her that as there was nothing left in her spending account she had actually spent $500 since starting work. As she pondered what she could have done with that amount I sat proudly and watched her brain tick over - a great lesson."

Alex's savings have since reached $1000 and Brian wrote to Money asking for the best way to invest.

I asked financial planner Scott Alman, founder of independent financial planning group Alman Partners, where he would invest $1000.

Alman also has a 15-year-old daughter, Celia, who coincidentally has saved $1000 from working in a pet store on Sundays. He says financial skills are like language skills - best learned when young.

"If Alex and Celia can now grasp the magic of compound interest, their financial future will be very bright," he says.

"For example, if they were able to save $1000 per year for the next 10 years and then save nothing more until they were 55, they would still end up with $179,159.

"Compare this to a 25-year-old who saves $1000 per year, every year until age 55, who would only achieve a nest egg of $132,408.

"This is a difference of $46,751 and Alex and Celia haven't had to save a penny for 30 years. If they had continued to save their $1000 per year their nest egg would have grown to $301,505 at age 55."

Alman says his example uses an interest rate of 8% which is higher than current bank rates. "This leads us to Alex and Celia's next consideration - where to invest for the long term?"

He says Celia is currently looking at index fund manager Vanguard's balanced fund.

The low-cost balanced fund invests 50% in income and 50% in growth investments.

Alman says that when the girls reach 18 they may consider opening a First Home Saver account, where the government matches savings with a 17% contribution.

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