One of the best things you can do for your kids is to show them how money works: how to make money, how to manage it, and how to make it work for them. The best way to do this is to invest for them while they are young, slowly building a solid financial foundation for them to stand on. A lot of people are quick to dismiss this as indulgent behaviour guaranteed to turn out spoilt-rotten sponges, but we urge you to think a little more broadly.

Making your child a millionaire is about ensuring your child is able to enter adulthood without serious financial worries, and with the advantages money can buy, and the kind of financial sense - instilled in them by you - that ensures a healthy relationship with their pennies and pounds for a long time to come. Granted, with inflation and without guaranteed rates of growth, you may not reach a million pounds by the time your children become adults. No matter - by then, they'll be finance-savvy savers and investors themselves, building on the foundation you began.

How to invest for your children

Stock market, stock market, stock market! The long-term return on investment in the UK stock market has been around 11% per annum since 1918. Take a look at what might happen if you invest just £25 each month on your child's behalf, and what might happen if you leave it up to them to start on their own:

Investing for your children

Child's age	Invest £25pm until 21 then stop	Start investing £100pm from age 21
0-21	£24,064	£ 0
21-60	£1,409,189	£696,991
Total invested:	£6,300	£46,800

With charges, inflation, and tax, these numbers aren't exact, but if you put £25 a month into a tracker fund until your child's twenty-first, and the historical return had been achieved, it would then be worth about £24,064. Hand the fund over to your child to sit and accrue compound interest, and by the time they reach 60, a total outlay of £6,300 would be worth just under one and a half a million pounds. Contrast this to the outcome of investing £100 a month from age twenty-one to 60 and the numbers speak for themselves.

Don't be overly cautious. With long-term investments, playing it safe is playing to lose. Over a long period, let the numbers be your guide - and those numbers tell us the stock market is the best bet for long-term investments. Before you settle for a low-grade savings account, consider again the historic return on investment offered by the stock market, and look at the alternatives on a £250 investment:

Stock market investing vs. more cautious investment

Year	4%	8%	11%
1	260	270	277
5	304	368	421
10	370	540	709
18	506	1000	1635
21	570	1258	2237

The rate of 4% represents a typical interest-bearing account for children, while 8% represents what you might expect from a tracker fund, with inflation and charges taken into account. The so-called "safest" investment vehicle, an interest-bearing bank account, is the most guaranteed to be a losing proposition, as, if you're getting a guaranteed 4% a year, you're missing out on the much greater growth the stock market can give you. It's true that you're protected from losing your initial investment if you take the conservative bank account route, but you're also "protected" from any major long-term investment returns. Over the long term, the "risky" investment in the stock market will usually prove to have had the lower risk and the higher gain.

It's not all on you to finance your child's future

Parenting is an expensive proposition at best. To help parents prepare for their children's futures, the Government is giving money away to all babies born after 31 August 2002 in the form of a Child Trust Fund. All children get £250 at birth, with an additional sum at age seven, to be invested in a cash fund or an index tracking fund. The cash fund would have an interest rate of around 4% while the index tracker would currently be running at around 8%. With these rates in mind, your child's fund could be worth a lot by the time they turn twenty-one and it won’t have to cost you a penny!

Do what you can and teach them the rest

The easiest way to teach your children about finance is to get them involved. Investing money on their behalf is a great place to start, but that's just the beginning. Teach them how money invested Foolishly will grow, and how, when the growth is added in, that will also start to grow. Show them how to save by opening a building society account for them, and get them to pay the money in themselves. You could even introduce the idea of buying shares in companies.

A final note on saving for children

However much you save, save intelligently! Steer clear of endowments and, if the stock market is too risky for you, consider an index tracker, or at the very least, a high-interest savings bond. You can even open a stakeholder pension for your child, and the Government will top up their investment with tax relief, just as they would with a pension for an adult.

10 Steps to Financial Freedom