Financially, the very best thing we can do to secure our children’s futures is to look after ourselves. To make good decisions balancing the short and long term, to have a robust protection plan, to reduce debt and to live within our means.
We’re inherently emotional when we think about our kids, and more often than not, when we think about our money.
If you’ve firstly looked after yourself, then these next steps will help you to get ahead, and give you the confidence you’re on the right track.
Consider your timeline
Selecting an appropriate strategy for your child, will depend heavily on the age of your child, and the goal that you have in mind.
The goals and support we want to provide our children may look similar, from a family holiday, private education, tertiary support, buying their first car, contributing to their wedding or helping them get into the property market.
However, depending on how far away this is for your child, will have a significant impact on the best way to get there.
In the next couple of years
If your goal is less than three years away, we really don’t want to take on any risk for this objective, because we haven’t got sufficient time to ride out any volatility (changes in the value of our money or investment).
What does this mean? It means sticking with cash. If you’ve got a mortgage, the best value for you will be to save cash for your goal, directly into your offset account.
If you don’t have a mortgage, a high-interest savings account (without any fees) is your strategy.
Cash right now isn’t sexy, it’s slow, and feels like we’re not doing much. But, that’s the reality for short term goals, we must accept a low (or no) return, in exchange for not taking on any risk.
Set-up an automatic savings plan, with direct debits, to ensure you’ve got the cash you need building up.
In three to 10 years
When our horizon extends beyond three years, we can and should be considering investment strategies. This is because we’ve got time to account for any volatility, and taking on a bit of additional risk will likely be compensated by higher returns than saving cash.
Investments such as exchange-traded funds (ETFs) or listed investment companies (LICs) will give us an opportunity for growth, and diversification, at a reasonably low cost. When assessing your options, the level of “growth” (such as balanced, growth, high growth) will line up with how much time you have until you plan to reach your goal. The shorter the timeline, the less growth (and therefore less risk). The longer the timeline, the higher growth you might be open to.
A portfolio of ETFs or LICs can be an excellent way to save for your goal regardless of your starting balance. It’s also particularly well suited to building up over time with regular contributions from your cash flow. So essentially you can “save” for this goal, using investments, the same way you would contribute to a bank account.
10 years plus
If you’re getting in nice and early, and you’ve got 10 years or more until your goal, an insurance bond is likely a great solution. Insurance bonds are an investment structure, like your superannuation, that allows you to invest in a really tax effective way. So you can invest in the same or similar assets as above (exchange traded funds, managed funds, property funds) but underneath an investment structure that will save you tax. This option will also work well for most starting balances (normally $1,000 is the minimum initial contribution) and you can “save” into this over time. Brilliant!
Alternatively, if you’ve got a reasonable chunk of change right now, and lots of time before you need the funds, property might work for you. This might be the case if flexibility is less important, and perhaps your goal directly links to the property itself, like giving your kids a leg-up on entering the market when they are older.
No matter the goal
Whatever your goal is, you need to be clear and intentional on how you’re going to get there. Hope and love is not a viable financial strategy.
Parents (or future parents) with time on their side, need to shift their mindset away from piggy banks and cash if they want to reach their goals.
The decisions we make now, compounded over time, make the world of difference. What we’re all trying to create for our families is choice. To be in a position where we’re making decisions based on what is best for our children, not what we can afford. Start early and start with what you have, and you will create those choices.
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About Rebecca Pritchard
Rebecca Pritchard is a financial adviser and coach with award-winning financial services practice Rising Tide. After personally experiencing the ground-breaking impact of financial advice in her early 20s, Rebecca transitioned from her career in corporate finance into the financial planning world, and she’s never looked back. As a passionate advocate of financial health, Rebecca brings a decade of experience in financial services to her clients and the community. Reach out to Rebecca and the Rising Tide via risingtidefinancial.com.au and follow @rfpritch.