As a parent you want to give your kid(s) the best you can – love, stability, the best education. But the reality is that kids are expensive.
It is estimated that, from birth up to their 18th birthday, one child, on average, will cost about R90 000 a year.
This, of course, depends on lifestyle and the parents’ income. But kids are costly and you need to have some money set aside for them.
How then, do you invest for your kids?
Start early: The best thing you can do for them is to start investing when they are born.
As soon as you have the birth certificate and you have settled in at home, start investing. The earlier you begin, the more compound interest will work its “magic”.
Most investment platforms allow you to open an investment online without having to go into their offices or have a meeting with a sales person.
Be consistent: When it comes to investing; you are in control of the three C’s:
- Contribution: How much do you want to contribute?
- Consistency: How often will you contribute?
- Costs: Make sure your investment vehicle does not have exorbitant costs associated with it.
You do not have to invest large amounts – you can easily start off with R500 a month until your kids are 18.
If you do that from the time they are one to when they are 18, the amount will have earned interest for 17 years at a rate of 8%, meaning your investment will be R211 173.25.
- From the start, put the investment into your child’s name instead of yours. This will prevent a tax nightmare when you eventually want to give your kids the accumulated funds.
Encourage family and friends to give money as gifts: Open a bank account in your child’s name. For birthdays and other celebrations when gifts are exchanged, encourage family and friends to transfer funds into your kid’s bank account. This will make it easier and more cost-effective for you to direct the lump sum amount into the kid’s investment fund.
If you feel uncomfortable about this, set a “limit” on how much your family and friends can contribute. For example, you can ask your close family for a gift of R300 or R500 and no more – if, like me, you can ask that from your three siblings, that works out to be R900 or R1 500. That amount, coupled with your own ongoing contributions, goes a long way and adds up fast.
It could also make your family and friends more aware of money, and inspire them to invest for the future.
As a parent, you might want to save or invest for your child’s education, put a down payment on a flat/car in the future or give them money as a wedding gift.
So, what investment vehicle is suitable to achieve this?
Tax-free savings account: A tax-free savings account is one of the best ways to invest for your kids. It allows you to set money aside and watch the investment grow completely tax-free and, when you withdraw the accumulated funds, there will be no interest, dividends and capital gains tax levied against you.
Consider a tax-free savings account as a long-term investment and take advantage of compound interest.
The maximum that you can contribute is R36 000 a year or R3 000 a month. If you were to contribute the maximum every year, it would take you 13.88 years to reach the lifetime limit of R500 000.
Let’s assume you pay the maximum of R36 000 a year for 13.88 years and you earn compound interest of 8%, your child will have more than R835 000. Not a bad gift.
Many asset managers offer a tax-free savings account from as little as R500 a month and you can often do it online.
Exchange-traded funds: Listed investment products that track the performance of a group or “basket” of shares, bonds or commodities are exchange-traded funds. This means that they simply track an index. For example, you can buy an exchange-traded fund that tracks the Top 40 biggest companies on the JSE.
Exchange-traded funds are attractive because of their lower costs. This is because they are passively managed compared with unit trusts, which are actively managed.
You can start investing in an exchange-traded fund from R250 via Easy Equities or R500 with most asset managers.
Unit trusts: A unit trust is an investment in which your money is pooled together with other investors’ money to invest in different asset classes: equities, cash, bonds and property. You can start investing in a unit trust for your kids from R500 a month or contribute a lump sum as and when you can.
The advantage of unit trusts is that you can start and stop your investment without incurring any penalties and there are no limits on how much you can contribute.
Education policies: At the end of the day an education policy is really an endowment policy.
Endowments are policy contracts that commit you to a minimum investment period of five years. Because it is a contract, if you cannot pay the agreed amount at the frequency (monthly or yearly) that was initially agreed upon, you will be penalised.
Education policies or endowment policies are often sold as tax-free investments, but this is not entirely correct.
The returns from these policies are taxed inside the endowment at a flat rate of 30%. Which means that if you are in a lower tax bracket, it does not make sense to invest in this vehicle. Also, the costs associated with endowment policies are high.
Put a goal in place. When it comes to investing for your kid’s future, remember the three C’s – and remember to put the investment into your child’s name.
It not only helps for tax purposes, but it will also ensure that you cannot touch the funds.
Life happens and I have been in the position where I tell myself that a portion of savings under my name belongs to my son. But in difficult times, I have dipped into it.
It was a game-changer for me to have my son’s investments in his own name because I would not dare to steal from his future.
Makhu is a personal finance coach