Investing for and with your kids – Starting young with good financial habits

Parental money worries are not just confined to the demands of early childhood – prams, cots, car-seats, nappies, childcare and whatnot – but to those future big-ticket expenses that your kids will inevitably encounter. And as most parents do, you’ll feel obliged to help out.

However, many of these potential future costs can be quantified and offset with a well-designed and proactive investment plan.

Some of the obvious post-childhood expenses likely to pop up include: education, travel, car purchase and first-home deposit. The first-home deposit being a particular concern in New Zealand currently, where home-ownership is increasingly dependent on a leg-up from parents.

Consider a Managed Fund investment portfolio

As an alternative to hand-outs, you might find it more rewarding, for you and your kids, to opt for a long-term investment plan. An investment portfolio of Managed Funds is a low maintenance and relatively cheap way to prepare for those future costs. Much like a savings account, you can contribute little-by-little over time, the difference being the money invested generates income.

A great example of the long-term benefits of Managed Funds is the recent success of the Fisher Funds New Zealand Growth Fund, that has just celebrated it’s 21st year in action. The funds return since inception is 12.7% and this includes an era with the GFC in the middle. $10,000 invested in the Fisher Funds NZ Growth Fund in 1998 is worth over $120,000 today.

Get the kids involved

You’ll likely be getting the ball rolling on your child’s investment portfolio far before they are ready to join you. However, you don’t have to wait until they are employed for them to start contributing.

Pocket money is investment money. A simple place to start is to set up a pocket money system in exchange for odd jobs around the house. When rewarding your child with cash for doing their chores, physically give them the money and ask them to put aside a portion of it ‘as an investment or savings’, this way, your child will learn not to spend all of their money – a skill that a surprising number of young adults have yet to master. You could start out using a money box, and once a month, take that money box to the bank.

We can all agree with, and see the simple logic in this approach – children learn best by doing, not by being told to do.

As the kids get older, you’ll be able to involve them more in the decision-making process, like choosing investments.

“What’s an appropriate investment strategy?”

This is actually a question about risk, specifically your (your child’s) risk tolerance.  The rule of thumb being, the longer the timeframe you’re investing for, the more risk you can afford to take (you can cope with the ups and downs over time if the general trend is upward).

With young children, you’ve generally got at least 18 years of investing before you’d need to pay for anything big – plenty of time. This means you could choose to turn up that risk dial and have a portfolio heavily weighted towards high risk assets such as equities.

A good tool to start the asset allocation decision-making process is the Sorted calculator or our ‘Invest – Where to start’ page. If it all seems a bit much, speaking to a financial advisor would be a good place to start.

Investing for kids – Tax tips

Tax on the income generated by investing will need to be paid. Children will typically have lower income tax rates than their parents, so consider getting them IRD numbers and investing in their names as soon as you can.

You’ll need to do some tax research when choosing funds – some funds, like the Smartshares ETF range, automatically tax at 28%, whether that’s the correct tax rate for your child or not. Once again, a great place to consult a financial advisor or give us a call.

For more information on tax rates, see the IRD website. For more information on Managed Funds tax, see InvestNow Tax Guide.

Investment portfolios are the new savings account

Roughly, a couple generations ago, a savings account was all you needed, to prepare for future expenses. But as the cost of living continues to rise and interest rates fall, simply saving on a here-and-now basis will see those future life expenses ultimately impossible to bare.

A fit-for-purpose investment portfolio will be, to the next generation, what a saving account was to the last.

Things to remember:

  • Investing with your children will help you prepare them for adult-life , teaching them good financial habits.
  • 18+ years of investing means you could take more risk. See our ‘Invest – Where to start’ page for more information.
  • Getting your kids IRD numbers and investing in their name should save on tax. Take a look at the InvestNow Tax Guide.
  • Watch out for Listed PIE’s – they’re automatically taxed at 28% PIR
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