Pocket money into KiwiSaver – how to maximise compound interest
Teaching your kids how to manage money is one of the most valuable life lessons you can offer. But what if you could go beyond budgeting and give them a head start on their retirement too?
That’s exactly what one of our Mortgage Lab clients has done—using KiwiSaver contributions from their child’s pocket money to introduce the concept of compound interest early on. The result? A financially savvy child and a powerful foundation for the future.
Let’s explore how it works, and how you can start doing the same in your household.
What Is Compound Interest—and Why Does It Matter?
Compound interest is the financial equivalent of a snowball rolling downhill. It starts small, but as time passes, it grows at an accelerating pace.
When your investment earns interest, and that interest starts earning more interest, that’s compound interest at work.
Take this simple example:
You invest $100 at a 10% annual return.
After 1 year: $110
After 2 years: $121
After 5 years: $161
After 20 years: $739
That original $100 has grown over sevenfold—not because you added more money, but because the interest kept compounding year after year. If you had simply withdrawn your interest each year, you’d only have earned $200 total. The magic happens when the interest stays in the account.
Now imagine what happens when you invest early and continue to add to it. That’s where the potential really shines.
KiwiSaver for Children: A Long Game Worth Playing
New Zealand’s KiwiSaver scheme isn’t just for adults. Children can have a KiwiSaver account from birth, and although employers and the government don’t contribute until they start earning income, voluntary contributions can still be made at any time.
Let’s say you make a one-off $1,000 contribution into a KiwiSaver growth fund for a newborn, and that fund earns an average 8% return after tax and fees.
By the time that child reaches age 65, that $1,000 could grow to around $178,000.
It’s important to note this assumes the money is left untouched for the full period, and that the returns remain consistent. Still, the message is clear: start early and let time do the heavy lifting.
Time Is Your Secret Weapon
When it comes to compound interest, the longer your money stays invested, the more powerful the outcome.
Here’s the difference that 20 years can make:
$1,000 invested at birth = ~$178,000 at retirement
$1,000 invested at age 20 = ~$36,000 at retirement
That’s over $140,000 more, simply because the money was invested earlier. Even without making additional contributions, the time factor alone can have a staggering effect on final savings.
Adding Pocket Money: Small Steps, Big Rewards
Now imagine layering regular pocket money contributions on top of that $1,000 starting deposit.
A weekly contribution of $20 may not seem life-changing, but over 65 years, those small amounts accumulate.
Here’s the breakdown:
Total contributions over 65 years = $63,400
Final balance (with 8% return): $2.3 million
You read that correctly. Just $20 a week (about the cost of a takeaways lunch) turns into over two million dollars by retirement. That’s the power of consistent contributions and compound growth.
A Real-Life Example: $20 Now Equals $1,600 Later
Here’s a scenario to explain to your child—maybe even show them the numbers on a calculator:
Your 10-year-old has $5,000 saved. You’re contributing $20 per week to their KiwiSaver fund.
If they keep this up until retirement (age 65), that fund could grow to over $1.35 million.
Now let’s say your child adds a single extra $20 to their savings one week.
That one $20 note turns into $1,600 by retirement.
It’s a brilliant way to demonstrate to your child that even a small contribution today can make a significant difference in their future.
But… What About the Here and Now?
It’s fair to say that kids don’t always get excited about money they can’t touch until they’re 65. Pocket money usually comes with expectations of lollies, LEGO or lunch with friends—not retirement funds.
That’s why it’s a good idea to split the money: some for KiwiSaver, and some for spending. For example, you might agree to a 70/30 split where 70% goes into their wallet and 30% into KiwiSaver or a separate savings account. This gives your child the satisfaction of spending while also building the habit of saving.
KiwiSaver or Savings Account?
If your child is under 18 and not earning income, they won’t receive government contributions or employer match contributions. But the investment growth is still worth considering.
So, which is better?
KiwiSaver: Great for long-term retirement savings. Funds are locked in until 65, which ensures the money can’t be withdrawn or spent prematurely.
Savings Account or Managed Fund: Offers more flexibility if you want the money to be accessible for university, a car, or a first home.
A good strategy might be to split long-term savings into both: some into KiwiSaver for retirement, and some into a separate managed fund for life goals before age 65.
Building Financial Literacy with Every Deposit
The benefits of this approach go far beyond the dollars and cents. By making KiwiSaver part of the pocket money routine, you’re helping your child:
Understand the concept of investing
Learn the importance of long-term planning
See the value of saving regularly
Build positive financial habits early
The lesson here isn’t just about retirement—it’s about building confidence, discipline, and patience. All crucial skills for managing money as an adult.
How to Get Started
Open a KiwiSaver account for your child through a provider that offers funds suitable for long-term growth.
Set up automatic payments from your account, even if it’s just $10 or $20 a week.
Involve your child in checking the balance and growth every few months. Use visual tools or online dashboards to keep it engaging.
Show them how compound interest works—there are free calculators online that help demonstrate the effect over time.
Revisit the discussion regularly, especially as they get older and start earning their own money.
A Simple Habit with a Huge Impact
We know that retirement might seem like a lifetime away for your children—but that’s the point. When it comes to compound interest, time is your greatest ally. By starting early and building a savings habit into something as simple as pocket money, you’re giving your child one of the best financial gifts possible: choice, freedom, and financial security in later life.
Even if you only start small, even if you’re not perfectly consistent—any amount, invested regularly, can make a world of difference.
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