For over 6 months I have been contemplating whether this experience would be beneficial to anyone if I shared it. I kept thinking, “Who would want to read it?” and “What would I say?” and “Would anyone care?” Well, here I sit on my way back from seeing the Grand Canyon whilst holidaying in the USA with the family. I have time, so I pulled out my iPad and started to write. So, here it is. The story of why I purchased those Xero shares.
I’m Shannon Smit, founding director of SMART Business Solutions, Xero Gold Partners and winners of the Xero Accounting Firm Partner of the Year – Victoria 2016. As a firm we were early adopters of the cloud and we’re huge fans Xero software and the company itself. Xero has changed the game for small business and accountants. I actually think there has never been a more exciting time to be an accountant.
So, being such a believer in Xero, I purchased $5,000 worth of Xero shares for each of my sons, then 12 and 10 years old. First of all, I must explain that this story is not necessarily about how many shares we purchased (though I am glad we we’re fortunate enough to be in a position to be able to do so). Now, some people call me crazy, but when I explain why I did it, maybe I’m not so crazy after all? You be the judge.
First and foremost, I wanted to teach my boys about money; how to save money, planning a saving goal (Eg, first car) and to learn about the stock market. They would learn nothing if I simply gave them the shares. Life is not like that, and the driver behind my decision to do this was to educate my boys and to spark a genuine interest in financial goal setting. So I came up with a plan that would achieve the educational goals I had planned from this investment. So, my husband and I sat the boys down and told them we had purchased $5,000 each in Xero shares.
The questions started. And so too did the opportunity to educate.
“What are Xero shares?”
They more or less knew what Xero was (they hear me talk about Xero a lot!). But what did shares mean? And so I explained what owning shares in a company meant, how they were now part-owners, albeit very small, in Xero. I explained what the stock market was, supply and demand for shares increases and decreases prices, if a company makes more it will sometimes pay ‘dividends’…and so the discussion continued. They were intrigued. We got onto the iPad and showed them the ASX, how prices went up and down, how people made money, but they could also lose it.
My youngest asked, “So can I have the money now instead of shares?” That was answered with a quick, “No!”
There was excitement in the room, but now I had to break the news that, of course, I wasn’t just going to ‘give’ them those shares. There was a catch…..
I explained to the boys that I have purchased the shares ‘on their behalf,’ but they must give me $5,000 by 5pm on their 18th birthday. Not a minute later. If they don’t produce the $5,000 by 5pm, the shares are mine. No exceptions. Technically, what I am doing is giving the boys an interest-free loan to buy the shares today, and they can repay us at cost in the future, so ultimately I will get my money back.
More questions. “What’s a loan?” and “What’s an interest-free loan?” and “What are repayments?” And so opened the discussion on loans, mortgages and how people use the bank to help them buy a home or other assets.
They then asked, how are we going to get the money to buy the shares? A job, of course. You will have to save money while working a part-time job.
I want my boys to get their first job at 15 years of age where they can start to learn the value of working and getting paid, but also about how it’s important to set aside some of what you earn each week for savings for the future.
So, why Xero shares?
An accountant and financial planner, I am. A stock broker or expert in shares, I am not.
If my clients ask about shares I always refer them to a stock broker. So again, you ask, why Xero?
Well, I put my tax hat on. My kids are minors, so if they earn ‘passive’ income (Eg, dividends is considered passive income), then they are taxed at the highest tax rate if they earn more than $416! So I definitely didn’t want shares that were expected to pay dividends in the next 5+ years.
The next criteria I wanted, was capital growth. I wanted the market value of the shares to increase, and by a lot if possible. As none of us have a crystal ball, in order to get shares satisfying those two requirements I was going to need to focus on companies that were considered ‘high growth’ stocks, meaning they could significantly grow but there is always a risk they would decrease. Given I had time and the nature of what I was doing with the shares, I was happy to take a high growth approach.
Now I love Xero, not as a share, but as a company and their software. Considering the subscriber base increases, their continual investment in the software and expansion internationally I felt this share was going to tick all the boxes of what I needed for my boys with this situation. Xero has only just turned the corner from losses into break even, and there are no expectations of dividends for a while as the company continues to focus on investment in the product rather than pay dividends. I am not saying you need to purchase Xero shares. I am not qualified to recommended such a thing, so you need to consider what are your own key criteria for considering shares and maybe even engage a stock broker to provide advice.
Where to from here?
The boys were buzzing for weeks that initial conversation. Even six months on, they are still learning from this. They are both still checking their Xero share price and portfolio value. Maybe it was good timing, but the shares have increased by over 50% so they are now worth over $8,000. My youngest recently calculated that if they continue to increase at this rate, the shares would be worth $42,000 on his 18th birthday. Obviously that is unlikely and potentially they will drop at some point, but that is all part of the learning.
I have noticed a change in the boys’ attitude to money. My oldest has worked out how much he needs to save per week if he works every week from age 15 to 18. This led him into researching how much would he probably get paid an hour, and how many hours he would need to work to just cover his savings target. He asked me, ‘what if I am late with the $5,000?’ I explained to him that the offer must occur strictly at 5pm on his 18th birthday, so with this in mind he may want to increase his saving target to have a bit of a buffer. Whilst I absolutely want them to achieve the goal, there is an important lesson in achieving the target with no opportunity of renegotiation. That’s real life and they need to learn that nothing is delivered on a silver platter.
My oldest even asked if he could have shares in lieu of gifts for his upcoming birthday. Why not? It may only be one or two shares, but maybe now he will diversify into different shares? The choice is up to him, but as his tax advisor I will recommend no expected dividends!
I’ll reiterate, doesn’t need to be $5,000. I only chose this figure as I thought this would ideally mean that they may have $10,000 by their 18th birthday to buy their first car. Regardless of the initial amount, kids can learn the same lesson with any amount of money.
Of course, if they happen to have saved enough money sooner than 5pm on their 18th birthday, they can repay me then if they wish to do so. What will be interesting is whether they actually sell the shares. They have asked whether they must sell them. At that point, it’s up to them what they do with the shares. Maybe they will have learnt the valuable lesson of saving, and maybe they will save above and beyond the $5,000 and don’t need to sell the shares. Only time will tell, but already 6 months into this and I am really pleased with what has been learned so far.
My biggest regret? I didn’t buy shares myself that day given the 50+% increase!
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