“What’s the best way to save for my kid’s future” is a common question we hear from our clients here at WealthFit. And, of course, like most financial questions, there isn’t a one size fits all answer.
The good news is, that there are a number of ways to put away some money for your little tikes so you can help them out financially down the track. The option or options you choose will depend on your income, cash flow and timeframe.
You also need to consider the tax implications of each option in relation to the owner of the investment. Will the investment be held in your name, your partner’s or your child’s?
Mortgage or offset account
By putting a bit extra into your home loan or offset account, you will be reducing or offsetting interest on what is likely your biggest debt.
This option requires good record keeping so you can keep track of the additional money you are putting away for the kids. It also requires discipline. To make this option work you need to be able to see the additional funds sitting there without being tempted to spend it.
Savings accounts and term deposits
Some of the banks have kids accounts that you can set-up in your child’s name. “Buyer beware” of the interest rate terms of these accounts.
Generally, with these accounts, you need to put a certain amount in each month to benefit from the higher interest rate. And, in our current low-interest rate climate, returns will often be lower in comparison to other investments. You also need to consider any tax implications for the future.
Direct shares are long-term investments and as your child grows they can become more involved in the investment process and decision making.
The downside is that making small, regular investment contributions is not cost effective because of broker fees. To get around this you could put money away every month into a savings account and at the end of the year invest the savings into your chosen shares.
Shares can be in a child’s name but if the child’s income is likely to end up over $416 a year, it might be best to keep the investment in the name of the parent who has the lower marginal tax rate. Speak to your accountant before you head down this road.
Managed funds provide access to a diversified range of investments and allow regular contributions.
Generally, managed funds need to be in the adult’s name who is also liable for the tax on the income earned each year.
Managed funds work well as a set and forget option. You could set-up a regular investment plan (ie. $100 a month). Down the track, when you need access to the funds, you would transfer them to your nominated bank account.
You just need to be aware that each time you transfer funds out of the investment, that you trigger a capital gains event. Again, always speak to your accountant first.
You may have heard of new technology which allows for automatic ‘round-ups’ and regular contributions into an investment account. These are phone-based apps that are easy to setup and monitor. Some examples include Raiz Invest (previously Acorns), Stash and BrickX.
The principle behind this is that when you make small purchases the app links with your bank account to round up the purchase to the nearest dollar and invests the balance in a diversified investment portfolio with the underlying assets in managed funds or ETF’s.
For example, you purchase your daily coffee for $3.50 and the app rounds the transaction up to $4 and invests the difference (50 cents) into your investment portfolio. You can also make regular instalments with dedicated savings. This is particularly attractive for people who struggle to commit a regular amount to savings but will not miss the few dollar and cents allocated via the round-up feature.
Insurance (Investment bonds)
Insurance bonds were all the rage back in the 80s. And they are coming back into fashion because they do have a lot of merit for investing for kids due to their convenience and tax treatment.
If you pay a higher rate of tax on your income, an investment bond could be a tax-effective way to invest for your kids, with the ability to transfer the policy to the child at a certain age.
Generally, where an investment bond is held for at least 10 years, you can transfer the policy to your child without them having to pay capital gains tax. This is because the tax has been paid at a rate of 30% by the company along the way.
Depending on the Insurance bond you choose, you can get started with as little as $100. After that, it is totally up to you how you contribute each year. You can set-up automatic direct debits or transfer funds yourself.
But, there is one trap. You cannot exceed the 125% cap. This means that you are not able to contribute more than 125% of the previous year’s contribution in any year.
The best gift you can give your kids
While putting away money for your kids to help them out with a car, education, gap year or house deposit is fantastic, teaching them how to be money smart is the best gift you can give them.
And the younger you start the better.
Simple things like having to save to buy something special. Showing them their bank account balance going up when they put money in there and down when money is taken out to buy something. Implement a savings system (ie. jars) where a percentage of their pocket money is put away for savings, spending and serving (donations or charity).
As your kids get older show them how to budget. Teach them that they can still have fun and buy the things they want, but they need to put some of their money away for the future.
There are so many ways to help teach your kids to be money smart. The reality is that your kids will copy you. If you have good money habits, there is a very good chance this will rub off on your kids.
For more information about investing for your children please contact the team at WealthFit.