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Would you rather give your child the latest Xbox game or R45 000?

Christmas gifts with a future.

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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COMMENTS   18

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More incorrect reporting FAKE NEWS! Your money halves about every 7 years in its buying power because of inflation. SO in 15 years you will have REALLY R 11,250. Key word “IF” you get 10% compounded.Why don’t you just say up to 15%?? Your covered at your “IF” 10%???????????

You also have a problem with your arithmetic. Money doesn’t halve every 7 years unless you have an inflation rate of about 10%. A rough rule of thumb is to use the rule of 72. Divide 72 by the inflation rate to determine the number of years taken for your money to halve in value. Thus using the current inflation rate of approximately 5% your money would halve in value in about 14.4 years (72 / 5).

Leachim2784….do you really think our inflation is around 5% ?
Inflation is different for maize meal,than for x-box.
I think a fair guide to inflation is to take the price of ie: bmw 3 series.
You will find that your money value halves in less than 7 years!
I think inflation on luxury goods is more like 8-15% pa.

Argentina has 60% inflation.

If you do not double your earnings/money every 5 years, you will grow poorer!

Zokey is right. We have a false infl rate declared as well as stealth infl. No problem with his arithmetic.

Agreed – really troubling when a financial journalist writes an article that is really presented as advice without understanding (or at least acknowledging) the difference between real returns (adjusted for inflation) and nominal returns. If Patrick knows where to find an investment yielding 10% real, post-tax annual returns, then that would make a great article.

Spend it and live it, if not, someone else will do it for you.

As usual MoneyWeb cannot do simple arithmetic. They use a 15 year period to calculate the future value and then talk about your 10 year old child being given the future value when they are 21 years old. The arithmetic that I was taught tells me that the difference between 21 and 10 is 11 NOT 15! Then they cannot calculate the future value of an annual deposit of R1200 compounded at 10% per annum. My calculations show an end figure of R41,939.68.

Give the man a break. It is holiday time and he has a word quota to fill 🙂

I am pretty sure the article refers to starting a savings vehicle for a 6-year old child. This would then indeed be a 15-year time horizon. 6+15=21. Where did your reference to a ten-year-old come from? 10% nominal annual returns, yes. 10 years, er, no…

What it, in fact, says is: “If your child is currently six years old, that would mean you could gift them that total on their 21st birthday.” Although he, quite gratingly, uses “gift” as a verb, presumably to sound more sophisticated than the basic “give”, there’s nothing wrong with the author’s calculations and something wrong with your comprehension skills, I think?

The article originally mentioned a 10 year old.

A R45K gift to your child for Christmas? By all means…if daddy drives a R900K car, and lives in a R4mil house 🙂 Indeed. And such spending is good for the economy.

To all our Christian readers, may I wish you a fantastic “Festival of the Sun God” / Fees van die Son-god” on the 25th 🙂 (Itself a pagan festival originating in Roman times 😉
This festival stretches for about TWO months from end October (most evident in retail stores) leading up to 25 Dec. Thus, let’s not point a finger at our Muslim community for Ramadan that lasts ‘too long’ for a single month…

Amen!

I wish you a merry christmas and happy new year hip hip hurray

Please..take it easy on that food and booze …REMEMBER its Christ’s birthday…not yours or you kids…

Misleading, clickbait headline! The comparison should in fact be between giving your child a new Xbox game annually for 15 years vs. R45,000 in 15 years’ time (before the erosion of 15 years’ of SA inflation)…

I won’t buy my kid any toys….just invest all the money.

How much will the years of therapy your child will need to sort out their daddy issues cost?

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