Investing for your children's future

Want to invest for your kids but don’t know where to start?
You’ve finally got your head around investing and now you want to take what you’ve learned and utilise it for the benefit of your little ones. 

Well aren’t you clever. 

Investing for our kids is an awesome way to set them up financially for when they come of age - be it purchasing their first car, funding a gap year or helping them out with a home deposit a little further down the line - stashing a little bit of money away consistently adds up, especially when we invest it.

There are a few things you need to know though, like the tax implications involved, why investing trumps saving and of course, how you can actually get started.

Why investing for your bubs is smarter than saving
Can’t I just set up a savings account and make regular deposits to that? Absolutely you can! Regular deposits are a great idea and if you’re putting away $20 a week for 18 years, that’s going to be $18,720 by the time you’ve finished. BUT if you chose to invest that money instead (working off the conservative 5% rate of return we talk about all the time at SOTM), over 18 years you’d have $29,306. That’s a pretty big difference, and it all comes down to compound interest, which in our opinion is the best thing since sliced bread.

How to do it
There are a few ways we can set this up, but we need to start by assessing the length you’re planning on committing to this investment for - the ways we choose to invest will vary greatly depending on how long we have and the level of risk we’re able to weather. For example, if your child is 13, then our plan will look very different to what it may look like if we’re setting things up for a newborn. 

We also need to think about what the money is intended to be used for, because that can also influence which way we choose to invest - is it for their first car? Their wedding? School fees? We will have to mould our strategy to what we want our outcome to be.

Our whiz bang cheat sheet is this:
If you’re playing with lots of time and have more than ten years to work with, consider an insurance bond which allows you to invest in a tax savvy way. Insurance bonds are designed to be a ten-year-plus commitment and generally if you make no withdrawals over that length of time, you won’t have any additional tax to pay – because the fund manager would have paid it at their corporate rate! You could also invest in shares traditionally in the way we often discuss, because we are looking at a really good amount of time where we’re able to weather the highs and lows of the stock market. 

One of our pro-tips when it comes to investing is to utilise tools like Superhero, who can make investing that little bit easier. What we love about Superhero is their accessibility - they offer $5 trades and $0 purchases of ETF’s which are ideal for getting your kids set up early with a diversified portfolio. Superhero also offers you the opportunity to trade with more than 2500 shares and ETFs, and you can start trading with as little as $100, which is very cool.

If we have a moderate amount of time - so around that five-year mark and maybe even longer, it is definitely still worth investing. ETFs would be a great place to direct this money as they offer great diversification and a good return. Again, our pals over at Superhero would be able to set you up.

If you’re investing in the short term, between 2-3 years or less then taking huge risks definitely isn’t worth it. As we know, your money needs to be invested for the long haul for returns to be substantial and to be able to ride out the risk of it being exposed to the ups and downs of the share market. Your best bet is a term deposit, or a high interest savings account. 

Tax implications to look out for
Tax for any child’s investment earnings are painfully high in Australia (66% for any investment income over $416) and that’s because basically the government wants to deter people from spreading out their tax by “using” their kids. Makes sense. Because of this, it’s a smarter decision financially for us to invest ourselves rather than organising a Tax File Number for our minors. We do need to be mindful of dividends though - if you own the shares, then dividends will need to be included in your tax return, which could increase your income and result in you paying more tax… best to put the shares under the name of the lower-income earner should you be in a relationship! However franking credits do mean that any additional tax isn’t going to be a huge issue so that’s something to remember! 

So don’t wait! Get started investing for your kids today - as we know, from little things big things grow (and they grow even faster the sooner we start!)

***Please remember our blogs aren’t intended as financial advice - they’re intended only as a starting point to give you a little extra info! For more in-depth advice catered to your personal financial position, please see a certified financial advisor.