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How to invest for your kids
If you’re thinking of investing for your kid’s future, but aren’t sure where to start, then this is the guide for you.
It’s never too early to start investing for your kids. Even a small weekly contribution each week can add up over the years into a tidy lump sum.
The money earned from an investment can help pay for university fees or living expenses, contribute towards a car, an OE, or a first home deposit. Most of all, it means your kid won’t have to arrange a loan and pay copious amounts of interest, which no parent wants to see happen.
Should you start investing for your kids?
Investing for your kids is one of the best things you can do as a parent. Since kids have time on their side it means you can invest in higher-risk funds, ride out any volatility and reap the benefits of compound interest. Kids are also taxed at a lower rate than adults so you’ll have more of their money to reinvest.
There are a few different ways you can invest for kids, so doing your research to find the right investment vehicle is key. Any bank or platform you use will need to accept under 18s and hold the investment in your child’s name but let you transfer control when they’re old enough.
You’ll also want an account that charges low or no fees and lets you make regular payments and extra contributions when you want for free.
What are the different types of investments for kids?
Here are some of the most common types of investments that parents typically consider when investing for kids.
Opening a savings account for kids is usually the first step on the road to investing. It keeps their money accessible, they can watch their birthday money grow if they’re saving for a toy or gadget, and it’s easy for you to make regular contributions into the account.
Saving can also teach kids that money doesn’t grow on trees and how to be financially responsible.
Do your research on which savings accounts are best for kids. Look for ones that encourage kids to save, have high interest rates or bonus interest rates for certain balances or not making withdrawals.
While your child won’t get rich on the interest, it’s a safe and easy way to learn about saving money.
If your kid is a young teen and has access to their savings account, putting a lump sum in a term deposit can remove temptation.
It can also show them how compounding interest works if you roll the term over. Since interest rates are low at the time of writing, a term deposit may not be a great long-term investment scheme but it can be a viable safe secure option.
Managed funds are a popular option for parents starting to invest for their kids. This type of fund allows you to invest in different asset classes that are well-diversified, easy to manage and accessible.
A minimum of $500 is usually required to open an account plus a regular payment of at least $50 a month. If you’re looking at an investment period of 10 years or more, then you might want to opt for a higher proportion of shares in your fund to maximise growth and returns.
It costs money to run a managed fund, so you can expect to pay a percentage of your investment each year in management fees. How much you’ll pay depends on the type of fund you invest in. You can find funds that charge as little as 0.1% or as much as 1.5%.
Keep in mind the more you pay in fees, the greater the impact on your investment over time. When comparing funds always look what the recent returns are after fees are deducted.
There are mixed opinions on whether KiwiSaver is a good investment vehicle for kids, now that the $1,000 kickstart incentive has been discontinued. On the pro-side, KiwiSaver is free to join and many schemes offer low or free fees for under 18s. The earlier a kid joins KiwSaver, the more time their fund has to grow.
However, your kid won’t be able to take advantage of employer contributions, until they turn 18 and start work, or the government tax credit.
Funds are also locked in until they turn 65 unless they choose to access them for a home deposit. This can actually be an advantage if you’re specifically investing for this reason and don’t want them to use the money for anything else.
Exchange-traded funds (ETFs)
Exchange traded funds (ETFs) track different indexes on the NZX, like the NZ Top 50 ETF or NZ Property ETF. The value of your kid’s investment will rise and fall depending on what the stock market is doing.
The beauty of ETFs is that they’re well diversified because you’re investing in different companies, and the funds are passively managed, so management fees are low.
Platforms like Sharesies and InvestNow charge low or no fees for under 18s, only require a small amount of cash to start and you can attach a kids account to an adult account, with the option to unlink it when they come of age.
Owning individual shares won’t cost you anything in management fees, and some platforms have low brokerage fees so it’s ideal for small regular investments.
However, share trading is risky if you don’t know what you’re doing. The lack of diversification and picking the right company or companies ends up being a gamble unless you go for well established brands, but even then there are no guarantees in the current economic climate.
Top tips when investing for kids
- Before you start investing for kids you need to be in a good financial position yourself and pay off any debt.
- Get an IRD number for your child so they don’t pay the same rate of tax as you.
- Research the tax requirements when investing for kids and know what your obligations are.
- Set their expectations about the money and what you hope they’ll use it for, i.e. university fees or a house deposit.
- Teach them financial responsibility rather than just giving them access to the account or a lump sum when they turn 18.
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