It?s so easy for proud parents, grandparents or godparents to put money away for the youngsters? future needs such as tertiary education. This practice is fine, provided the kids are taught to save separately and build up their own money skills along the way. Here are some tips for doing both:
Saving for kids
When a precious child is born, you want the best for them. You decide to set money aside in the hope that it will grow significantly over the years; so much so that on the child?s 18th or 21st birthday, you give them access to enough money to spend on a car, degree, housing deposit or a trip around the world. All you ask in return is to be loved forever for it. There are a few options to consider when deciding where to put this money in order to achieve maximum growth:
Opening a bank account in a child?s name is the simplest option and allows quick and easy access to the money. The downside is that long-term growth prospects are limited and tax rates can be pretty high once they start earning significant interest. According to the Australian Tax Office, minors (under 18) are taxed 66% for interest earnings over $416 and less than $1,307. A better idea could be to invest the money in the name of the parent (or grandparent) earning the least money in order to pay less tax.
Investment bonds (Insurance bonds)
Investment bonds can be very tax effective with great long-term prospects but added risk, depending on type. They are a tax paid investment, meaning the investment provider pays the tax for you so there is nothing to declare on anyone?s tax return annually. This is generally the case only when the investment is held for ten years or more. A wide range of companies offer these with a variety of investment options including shares, property and fixed interest. Keep in mind the setup and management fees involved with investment bonds.
Education savings plans
Education savings plans usually involve locking the child?s money away until they reach high school and offer themselves as a tax-free investment, but only when the money is used to fund education. So, the money cannot be used for other activities.
A family trust is complicated but it helps take advantage of lower marginal tax rates. It does this by allowing the profits of the fund to be distributed amongst the different members by the trustee at their own discretion, hence the name, discretionary trusts. For example, the trustee might decide to distribute all of the profits to a full-time university student with no income (one of the members of the family trust) to take advantage of them being under the tax-free threshold so as to pay no tax on the entire family trust?s profits. There are costs to consider when setting up a family trust and lots of specialist advice is required.
Investing the money directly in shares can be very risky but can definitely pay off in the long term. According to the ASX?s latest Long-term Investing Report, over the past 10 years, Australian shares averaged returns of 7.1% per annum. A lot of money can be made from shares but obviously it depends on which companies you select so be sure to do your research.
There isn?t a best option of where to put money away for a child?s future. There are numerous factors and personal preferences to take into account such as timeframe, taxation, purpose and liquidity of the investment when deciding which suits you most.
Warren Buffet once said:
“I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.”
So try not to be too generous.
Teaching kids to save
Should you pay Pocket money? How much?
Using a pocket money system is a great idea to start the process of teaching children money management. The amount given is a personal thing. Some people give $1 for every year of age. So a five year old would get $5 and a ten year old would get $10. Whatever the amount is depends entirely on budget restrictions and your personal situation. However, the key is regularity.
Pay them for chores?
Tying pocket money to jobs around the house is a controversial topic. Some parents feel children should “earn” their pocket money, giving them an early grounding in work ethic. Others feel the linking of pocket money to performing jobs is a mistake and can devalue the money skills children might otherwise learn. They argue that kids may not do their allotted jobs around the house if they only have to give up a small amount of pocket money and that jobs should be a family responsibility not associated with money.
To keep both camps happy, perhaps a base amount of pocket money can be paid with your child having the ability to earn more by doing regular jobs for the week. You can also encourage your kids to earn money by setting up their own small business.
Let them control their own spending
Don?t be afraid that the child won?t spend the money wisely. Making mistakes is an important part of education, as you can learn from them. It?s better to make mistakes now when they are young rather than later in life – and that?s what pocket money is for.