Investing a 13 Year olds Pocket Money – Part 1

In 2019 I was gifted a copy of the Barefoot Investor. Which my wife read. And then I did, because she told me it was full of great advice regarding how to think about our finances. And this, like everything my wife says, turned out to be true. It was instrumental in turning our financial position around.

And being a good parent, I immediately tried to pass this financial advice on to my children. This post is a story about my youngest daughters finances. She was 13 years old at the time. So her finances were not very complicated.

$304 at the CBA

My wife and I moved our accounts to ING (fee free) and set about making a whole raft of accounts. Segregating funds into multiple accounts for different types of spending and saving is an important part of managing our money. One of the accounts was for my 13 year old daughter. I closed down her Dollarmite account at the CBA, and moved her funds across. I didn’t want a pre-approved credit card arriving in the mail on her 18th birthday, and this seemed like a way to prevent it. She had $304.36, in an account earning 0.5%pa.

Talking Family Finance

Barefoot Investor for Families

My parents never talked about money management with me. It was was not something my parents did. Because it was not something their parents did. But Scott Pape, in the Barefoot Investor, makes an emphasis about talking finance with your children. Making your children financially literate is just as important as teaching them how to cook, and iron, and drive a car. And my then 13 year old daughter was super interested in the finance, even though she probably wasn’t understanding it all. But she was keen to put it into practice.

Returns of 0.5% are not very good. It is literally earning 50 cents for every $100 you have saved. Her $304 would earn $7.50 by her 18th birthday. We looked into something that would give better returns over the next 5 years.

Investing in the Stock Market

The ASX (Australian Securities Exchange) tracks publicly traded companies, and allows the general public to buy shares, and own a part of those companies. Shareholders are quite literally, part owners of those companies. And shareholders make money when a company is profitable. If the companies go up in value, then each share is worth more. And the company profits are paid directly to the shareholders as dividends. The divided is your payment for owning (a part of) a successful business.

Savings in the CBA or Shares in the CBA

Commonwealth Bank Shares are currently valued at $101.70. Katherine could afford to buy 3 of them with her $304+. They have just paid a dividend of $2 per share. Meaning she could have earned $6 in dividends. Dividends pay out twice a year, and the dividend from February was $1.50 per share, which would have earned her $4.50.

  • $304 in savings in the CBA would have earned her $1.50 in interest this year.
  • $304 in shares in the CBA would have earned her $10.50 in dividends this year.

And that’s just the return from the dividends. There is also the increase of share price to consider. CBA shares listed in September 1991 of 1991 for $5.40 a share. 30 years on, they are worth over $101 a share, growing, on average, 9.8%pa.

The ASX as a Whole

Over the last 30 years, the ASX, as a whole, has gone up in value, an average of 9.7% each year. That means the cumulative price of all the shares on offer, from all of the companies, has gone up by 9.7%. Now some of those years it has gone down in value. And some of those years it’s gone up by more than double. But investing is for the long term, and the average is what interests us. If Katherine’s $304 could average 9.7% each year, compounded, it would generate $189 in earnings in 5 years.  A return of over 25 times the 0.5% she’d get from just keeping it the bank.

The following chart is from Wikipedia, showing the value of the Australian Share market from 1875 to 2013.

ASX from 1875 to 2013

There are dips in there, of course. Some big ones. 1929 was a bad year to start investing. But over time, the market goes up, and by 1935 it was back to even, and going up from there.

But that’s the ASX as a whole. Some companies will go up, and some companies will go down. Some companies will even go bankrupt and close down for good, as happened to many businesses in 1929. If you own shares in a single particular company, there is always a risk you could lose all your money. But if you invest in the market as a whole, you guarantee to profit, as long as you don’t sell when the market is down. It’s just a matter of waiting.

The question is, can you buy shares in the whole ASX, instead of a single company? The answer, is yes. But this post is long enough, so we might continue this in a Part 2.

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