What is the value of one of the most popular Xbox games? According to online stores in South Africa, it will cost around R1 200.

For a lot of people that is already a fairly steep price tag, and certainly one that would make many wonder what else they could get with that money. If you’re thinking of buying one as a gift for a child, this should perhaps be even more of a consideration than it seems on face value.

What if you invested that money instead? And did the same next year, and the year after that?

The simple calculation below puts this into perspective. If, instead of using that money on an Xbox game every year, you invested it into a fund that earned a compounded annual return of 10%, it would grow to over R45 000 in 15 years:

Illustrative investment growth
Initial investment R1 200.00
Annual addition R1 200.00
Compound annual growth 10%
Value after 15 years R45 256.08

If your child is currently six years old, that would mean you could gift them that total on their 21st birthday. How might they value that against the 15 Xbox games they might have received instead?

This is obviously an extreme example. I am not advocating not giving your children any Christmas presents for the next decade and a half. However, it is worth considering what we value.

More realistically, what would growth on that investment look like if you bought Christmas presents for half of the R1 200 and invested the other half?

Illustrative investment growth
Initial investment R600.00
Annual addition R600.00
Compound annual growth 10%
Value after 15 years R22 628.04

That is still an appealing amount of money. Would R600 worth of Christmas presents over the next 15 years match up? Would your 21-year-old consider them to be worth the same?

In reality, every purchase we make today has relative future value. We are constantly making trade-offs between our present and future desires.

The popular and amusing ‘Thank me later’ advertising campaign Investec Asset Management has been running this year has carried this same message:

‘Not spending on this month’s ‘must-have’ item and rather investing that money is never easy, but it can contribute to something far more valuable in future.’

When investing on behalf of a child, the monetary value is not the only benefit. The opportunity to instil the discipline of investing, seeing a pot of money grow over time, and appreciating the need to consider the future are all incredibly important lessons.

By involving your children in the process, you also give them the confidence to deal with their own money when they become independent. The earlier they are exposed to the idea of growing their wealth by paying themselves first, the more likely they will be to be responsible for their finances later in life.

Show your children how to read the statements they get from their asset manager or stockbroker. Encourage them to see how the power of compounding works as it grows year after year.

Once they understand the idea that money makes money, you might be surprised how excited they get about the concept themselves. In fact, you may even discover that, in time, if you give them the option of the Xbox game or the investment, they will make the more beneficial decision on their own.

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