Investing for your kids - How to give them the best head start in life
Investing on behalf of your children can give them a great financial head start in life. The earlier you begin, the higher the potential financial rewards for them in the long term.
The combination of regular ongoing contributions and compounding investment returns can add up to a decent amount of money, which could be used for buying a first car, funding a university gap year, or placing a first-home deposit in the future.
But where should you start, and what are the main factors you need to consider?
Create a plan
Before doing anything, you need to make sure you have a realistic investment plan. This is all about deciding what makes the most sense in terms of your family’s overall financial budget. That analysis includes determining what you can afford to invest initially, and how much you can afford to contribute on an ongoing basis.
For example, you may have $3,000 to invest as a starting amount and can afford to make additional contributions of $250 a month (or quarter).
While your financial circumstances may change over time, it’s important to have mapped out a strategy that makes sense financially, and one that can be followed for a long period of time.That will give your children the best chance for long-term investment success.
Decide on how
Investing for children can be done on their behalf using a minor’s account where the investment is held in an adult’s name as “trustee” (and the child is listed as a beneficiary). Under this option, parents will essentially be custodians for the investments until the child turns 18. The shares can then be transferred from the parent across to their adult child.
It’s important to seek professional advice on what structure will work best for your family, especially in regard to ongoing tax on income and future capital gains tax. Unless a tax file number is quoted, pay as you go (PAYG) tax will be withheld at 47 per cent from the unfranked amount of any dividend income earned.
Also keep in mind that if a minor owns shares and currently earns more than $416 a year, a parent must lodge a tax return on their behalf.
Choose a strategy
Just like adults, there are different ways to invest for children. Again, it comes down to what you can afford to invest together with your investment time horizon. For a longer-term strategy, you could consider a low-cost listed investment company or exchange traded fund that invests in the Australian share market. Because you’re looking at investing over a long-term period, your children have time on their side.
The share market is prone to short-term volatility. Yet, over the longer term, it has delivered strong growth. For a child investor, what happens in the short term will have little bearing on their long-term returns.
Growth of Australian shares
Did you know that in the 30 years from 1992 to 2022 Australian shares on average returned 9.0% p.a1.
That means that if you invested $10,000 for your child into a broad-based Australian share index fund (and reinvested dividend income) that initial investment would now be worth as much as $131,000.
Despite short term volatility, Australian shares have proven to be a sensible investment vehicle for those with patience and the ability to consider the long term.
If you are interested in investing into a portfolio for your children, why not give us a call to learn more.
1. https://intl.assets.vgdynamic.info/intl/australia/documents/resources/A1-2022_Index-Chart_poster_02.pdf