You are a responsible parent; you want your children to have the best possible start in life. They should be eating well, doing well in school, and keeping up with their regular dental check-ups.
You can also invest in their future. If you invest in your children’s future by setting up an investment account for them, you will also have the ability to provide for them when they are older. It’s never too early to start saving for the future of your children. If you can save a little each week, you will have the ability to build up a substantial nest egg.
Why Should I start investing for my children?
There are many good reasons to invest for your children, but the most important reason is that you need to do it for your family’s future. The future is unpredictable; and, having set aside a fund for your children, you can create some more certainty. You can also take advantage of the lower taxes that come from your child being in a lower tax bracket. And it also provides them with financial education.
Their future may not be so certain.
These days, kids have a lot of support from the government. However, these programs are not guaranteed to continue in the future. The best way to provide for your children’s future financial needs is to invest in their future by setting aside a portion of your own money each month to be able to help them in the future, maybe for their education or a home deposit.
Time is on their side.
Kids usually have a few years before they need to make major financial decisions. For example, a five-year-old will probably not think about buying a house until they are in their twenties. Since your child will usually have 20 years before they need the money, it is a good idea to invest in higher-growth investments. There is plenty of time to ride out any volatility.
Giving them the best start
Having investments available for your child to use for either their first home deposit or paying for their university fees means that they won’t need to take on large amounts of debt when they are young. And it’s not as hard as you think, you put in a little of your own money away over your children lifetime. It’s best to start your investing for your children as soon as you can.
Income tax rates are progressive, meaning that the more you earn, the higher your tax rate will be. For example, for every dollar you earn above $70,000 a year, you will pay 33% in income tax. Your child is not going to be in this bracket. Rather they will most likely be in the 10.5% bracket. This allows them to keep more of the profits which can compound over time. Remember though- listed PIE funds are generally automatically taxed at 28%.
Teach them Financial Literacy
The main reason that I would want to invest for my children is that I want them to learn about money. It’s up to you as a parent to teach your children about money. We all know how well personal finance is taught in schools. If you want your children to have the ability to make their own choices about money, you should provide them with an opportunity to do so. By giving your children the chance to make their own decisions about money, you can help them to become financially literate.
Investing for your children isn’t the only way you can teach them about money. You can teach them about money by bringing them into everyday money conversations. Or invest in online programmes designed to teach them about how money works.
What are you investing for?
There are generally three things parents want their children’s investment to be used for. Either using the money toward a home deposit, university or training fees, or as a retirement nest egg.
First Home Deposit
When it comes to buying a home, it’s important to keep in mind that real estate prices are constantly going up and up and up. Today, it’s not uncommon for a home’s price to increase by tens of thousand dollars in just a few years. And who knows when this will stop.
Investing for your child’s first home deposit will help them when it comes time to buy their first property. Along with some government assistance through Kiwisaver or the HomeStart Grant, your investment, and your child’s savings, they should have a substantial deposit to secure a home.
Education and Training
Education and training are investments that pay off in the long run. Helping out with your child’s education through university or an apprenticeship will allow them to earn more over their entire working lives. Check out this article for more information. Investing for your child will in it self teach them about money too.
We all know that we should save more for retirement. Contributing 3% towards Kiwisaver and paying off our homes will not be enough for many of us to maintain our current lifestyle into retirement. So why not help your children by investing in their retirement.
How to invest for your child’s future?
It’s generally best to find an investment service that is child friendly. They should obviously allow you to open an account for your children. Some investment companies do not allow children to open an account. The investment service should allow deposits from more than just one nominated bank account. This is important because the child may have a grandparent or family member who wants to help with their investment. The fees charged by the investment service should be low or free since it is likely that your child’s balance will start small, fees can have a large impact over time. And finally, you need to have made an informed decision about your child’s investments- Children don’t have the knowledge and maturity to make sound decisions on their investments.
Look for investment services that have;
- Low Fees or Free
- Multiple Contribution Streams
- Multiple User Logins
Here are some of the main types of investments that parents consider when they are thinking about investing for their children.
Savings Bank Accounts
It’s a great idea for your children to have a savings account to learn how to use money. It’s not a great idea to invest in a savings account, as you will earn next to no interest. You may get a little interest on your money, but inflation will take its toll. Skip the bank account as an investment option for your child.
The same goes with a term deposit these days- although better than a bank account- inflation will still take its toll. Average inflation for the last few decades is around 2.1%, and many of the term deposits offered these days are about the same.
Just over 300,000 young New Zealanders are enrolled in KiwiSaver. A KiwiSaver account may be a great way for young people to get on the property ladder by allowing you to use it as a deposit. This seems to be pretty normal these days- although I don’t know how sensible it is to use our own retirement investing scheme to invest in houses. There are no other real advantages in opening a Kiwisaver account for children when compared to any other fund provider. There is no government contribution until your child has turned 18. They cannot take advantage of employer contributions. And there is no longer a $1000 kickstart incentive.
Managed funds, ETFs, and Index Funds
Funds that invest in shares and bonds are a good way to get started with investing for your children. You can pick a fund based on your level of risk tolerance (remember though you are really choosing for your child, and they can afford to take on more risk since they have time on their side) and the amount of time you plan to invest. The three big advantages of funds are flexibility, accessibility and potential for higher returns.
Different fund providers allow you to open a child account. These accounts are generally cheaper or free when compared to a regular adult account. For example, Sharesies has a Kids Account, which has a half-price membership fee. Also remember that some platforms, such as InvestNow, don’t charge any membership fee, making them a great option for children. Even when membership fees are low, they can still be a large percentage of a child’s investment.
How Much Can You Expect To Have When Your Child Turns 18?
The amount of money that your child will have when they turn 18 will depend on how much you decided to invest regularly. For example, if you set aside $50 a month to invest in a low-fee diversified index fund, you can expect to have around $20,000 saved when they turn 18. Assuming around 7% return after fees.
Given that the average return of the NZX50 was 7.8% over the last 70 years (including the NZSE-40), and the S&P 500 average return was 9.8% over 90 years- it’s not a bad estimate. Remember that of this $20,000 that your child has when they turn 18, only around half of it is money you have deposited. The rest comes from compound interest. And if you increase your contribution to $100 a month, you can expect around $40,000 when your child turns 18.
$50 per month = ~$20,000 at age 18
$100 per month = ~$40,000 at age 18
What Do you Need to Start Investing for your Child?
To start investing for your child you need the following;
- A unique email address for the child
- A proof of ID, generally a Birth Certificate as your child probably doesn’t have a drivers licence yet
- Proof of address- which is generally proof of your address
- Tax details including an IRD number, RWT rate, and PIR rate
I would personally recommend InvestNow, or Simplicity for a child’s investment account.
Recommendations for Kids
InvestNow provides a large range of funds to choose from, and they also allow for multiple members to have access to a child’s investor account. They can also link your membership to multiple investor accounts if you have more than one child. They can even set up a temporary email address for your child if they don’t have one of their own.
Pros: No Membership fees ever, a minimum investment of $50 for a Regular Investment Plan.
Cons: Watch out for funds with higher fees of 2% or more, the number of funds available can be overwhelming for some.
Simplicity provides a set and forget investment option for your child. They waive the $20 management fee until your child has turned 18. You solely manage the account until they come of age.
Pros: Low management fee of 0.31%, membership fee waived until 18 years old, well-diversified funds
Cons: Minimum investment of $1000, five funds to choose from (Growth, Balanced, Conservative, NZ shares, and NZ bonds).
Final Tips when investing for kids
- Before you invest in a child, you should be able to handle your own finances responsibilities.
- So that your child doesn’t pay the same tax rate as you, get them an IRD number
- When you’re investing for your children, you need to understand the taxes involved.
- Set their expectations about the money and what they will use it for, i.e. university fees or a home deposit.
Final Thoughts about investing for kids
One thing to remember is that you may lose control by having an investment account in your child’s name. If you invest or hold money in a specific individual’s name, they may request and be granted the money as soon as they turn 18. They might choose to spend the money on something else rather than for the specific reason you had set out. So if you really want the money to be used for a specific purpose, you may want to invest under your name instead- you might lose some tax-advantageous- but are guaranteed the money will be for the purpose you set out for.
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Information presented on the Website is intended for informational and entertainment purposes only and is not meant to be taken as financial advice. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through. Please note that I only recommend products and services that I have personally used.