The best investment for your children is to ensure you have a secure financial future.
If you are financially secure, it means you’re happy and able to provide a stress-free loving environment in which your children can thrive. I know it sounds a bit selfish, but you are the most important factor in your children’s development; far more important than having a nest egg.
But if you do have yourself covered, giving your kids a financial head start can be a terrific idea.
Back in the old days it was the old endowment insurance policy. Parents would answer the knock on the door from the life insurance salesman who would extol the virtues of how a few dollars a week, contributed to the policy, would set up your child for life when it matured on their 21st birthday.
Naturally you would be constantly reminded of this little nest egg while growing up, and as the magic day approached your thoughts would wander to what you would spend this massive amount or money on… a new car, a house maybe!
It wasn’t until the cheque arrived that you became aware of the poor investment returns and high fees involved in this type of investment.
Thankfully, there are a lot more investment options for parents today, from savings accounts to education and managed funds.
The easiest way is simply to open an online savings account that pays a decent interest rate and has low or no fees. The compounding interest will add to the balance quickly. Just talk to the institution about whether an account can be opened in a child’s name, or whether you have to be trustee for it.
A couple of illustrations of how powerful compounding can be in building a long-term nest egg for a child are:
Scenario 1Invest $100 a month into a savings account paying 7 per cent, and at age 21 years your child will receive $84,000 (but you’ve outlayed $25,300 over the term).Scenario 2Deposit a one-off $5000 (maybe a tax refund or unexpected windfall) and just leave it in an account earning 7 per cent. The balance at your child’s 21st birthday will be $21,653.Scenario 3Put $5000 into a 50/50 geared fund earning 5 per cent growth and 4 per cent income. The balance at 21 will be $60,000.
Remember though, it’s critical to get advice and always check the tax situation. Depending on how it’s set up you may have to pay tax at your marginal rate on the interest.
Many have gone down the managed fund route, particularly when a regular savings plan is attached.
A managed fund is where thousands of investors pool their contributions into a fund which is then managed by professional investment experts (who do all the research and make all the investment decisions). While many have a minimum investment of $1000, others allow investors to then contribute a small amount on a regular basis.
The attraction of these savings schemes is that they provide a regular, disciplined way to build wealth and have the benefit of professionals making the decisions.
Another option is to invest in quality shares.
It’s an interesting idea because the fundamental basis for good share investing is to choose quality shares and give them time to work and make a return.
Talking to a few stockbrokers recently for their thoughts and selections on shares for the long term provided some interesting results. They were suggesting look at big, strong industrial shares which pay a dividend and have a proven track record.
The Big 4 banks have proved to be strong performers over recent years and, because they’ve been around a long time, are likely to be around for a while to come. They have a history of strong capital growth and income returns.
Other blue chip good dividend paying shares recommended were Telstra, CC-Amatil, Woolworths, Wesfarmers and Westfield Group.
Make sure you talk to a stockbroker or financial adviser about a portfolio of shares that is right for your children and remember investing in shares can be volatile.
There are also a number of education and “scholarship” funds on offer which can offer a good option. Choose wisely, as a common problem with some of these is their inflexibility. For example, if your child doesn’t go to university, you get back what you’ve invested at a poor return.