My five top tips for investing for your children
A topic that comes up a lot at Bounce Financial is how to go about investing for your children. For a lot of our clients, they are the first in their families to go to university and to achieve success, and they want to ensure that their kids have the same opportunities they had.
So how do you go about investing for your children? In this article, I’ll give you my five top tips for investing for your children.
TIP 1: APPLY YOUR OWN OXYGEN MASK FIRST
When it comes to money and investing, I encourage people to ‘apply their own oxygen mask first’.
What does this mean? Well much like in airplanes, you need to ensure that you are taking care of yourself first before helping children.
This means ensuring that you have a good spending plan, you’ve bought your house and have started your process of paying additional repayments on your home loan and investing.
I can’t count the amount of times I’ve met people who kids’ accounts have more money in them then their own accounts. Whilst this is noble, if you don’t look after yourself first, you may find yourself relying on your children in your old age.
Whilst your children will appreciate the gift, if you later call on them to repay that gift, they may not feel the same way.
TIP 2: WATCH OUT FOR TAX
One thing you need to be particularly cautious of when investing for children is tax.
Children have special tax rates applicable to them on unearned income (i.e. investment income) which can be as high as 66%. This is to discourage people from trying to reduce tax by investing in their children’s names.
In most instances, you are better off to put the investment in the lower earning partner’s name as trustee for the child.
There are a lot of exceptions to this rule however and it really comes down to your personal circumstances so make sure you do your research (or seek advice) before starting an investment as getting it wrong on tax can erode any benefit of the investment.
TIP 3: RECONSIDER INVESTMENT PROPERTIES
A lot of my clients really want to buy an investment property for their children. Whilst this can definitely work, you really need to think through some of the problems that can arise.
Investing for your children is a long-term investment. In some instances, you may be waiting 25 years or so before they access the investment and a lot can change in that time. For this reason, it can be helpful to favour flexibility in investing.
As an example, let’s say you buy an investment property for your three children. What happens once one child wants to sell the property but the other don’t? What if one child wants to live in the property? What happens if one child needs money fast? Property is not particularly divisible which can create issues.
You can get around this by buying three properties, one each for the children, but you are taking on a lot of debt (and risk). What if you then want to do renovations to your home but the bank won’t allow it as you have too much debt?
Whilst investment properties can be good investments, you really need to do the work to determine the answers to these questions before they become problems.
TIP 4: CONSIDER AN INVESTMENT PORTFOLIO
When it comes to investing in shares, I strongly recommend that clients don’t invest in individual shares. Instead, I tend to focus on low-cost, diversified investment portfolios.
When it comes to investing for children, there are two things you want to achieve:
- You can contribute to it regularly, preferably at least monthly; and
- It automatically invests for you.
For this reason, I tend to favour managed funds over ETFs although you could achieve the same outcome with both.
The benefit of a well-diversified investment portfolio is when your child does want to access the money, they can access some of it, all of it and everything in between.
The flexibility of an investment portfolio can really suit this type of investment.
TIP 5: CONSIDER INVESTMENT BONDS IF YOU ARE BOTH HIGH INCOME EARNERS
In Tip 2, I suggested it may be appropriate to put the investment in the lower earning spouse’s name for tax purposes. But what happens if you are both high income earners?
In this case, you may want to consider an investment bond. An investment bond can be a tax effective way of investing if you intend to invest for greater than 10 years.
These can be very complex so ensure that you seek advice before considering whether this suits your scenario.
Investing for your children can be a great way to give them a head start in life. But with the perils of tax and different types of investment, it’s a topic which can get complex fast. As always, please reach out if you have questions, we love talking money.