This article was originally posted on Jun 09, 2017
Who hasn’t at (probably multiple) points in their life wished their parents had set up an account for them when they were babies? Clearly, if that had happened we would be millionaires instead of sadly eating our last packet of mi goreng.
I don’t have kids yet but investing in their future is definitely something I’d be right on board with. In the name of future research, I delved into the topic – here’s what I found out.
Why invest for your kids when they’re young?
If you’ve got kids now or are planning to have them in the future, one thing’s for certain – those kids are gonna want money. They won’t want to be eating a futuristic mi goreng and feeling penniless. They want to be able to pay for university or go on a kayaking tour of Florida (probably underwater by then thanks to Trump)
Investing small amounts consistently over a long period of time can really help your kids. Check out my Investment Value Calculator. This can give you an idea of what a consistent monthly investment could grow into over a long period of time.
If you invest $50 a month for 18 years you would probably wind up with around $21k. And if you invest around $100 a month you might wind up with around $43k! This assumes you’ll get a 7% return on your investment (what you might expect from an index fund) and that you’ve reinvested all the dividends your investments have made along the way.
This is way more money than you would get if you simply saved money for your children by putting it in the bank or in a term deposit. If you invested that same $50 a month for 18 years for your child with a 3% return, you’d only end up with about $14k (let’s be honest though, who’d really turn their nose up at $14k)
Can you invest under their name?
Yup – in New Zealand it’s completely legal to invest in their name. Having said that, some providers don’t allow shareholdings being registered in a minor’s name. It can sometimes be difficult to prove the funds aren’t being used to evade taxes which makes some providers want to steer clear. Smartshares and InvestNow both allow investing under a child’s name
This link on link market services gives some great guidelines to keep in mind.
Do you pay less tax by investing under their name?
Just to make it clear, I’m no tax specialist and this is not tax advice, so best to chat to a professional on this one if you want to know more!
However, I do know that it is possible to pay less tax on investments under a minor’s name.
In general, the tax you pay on investments will be determined by your PIR (Prescribed Investor rate which determines how much tax you pay on your income from investments), which is determined by your level of income.
As children are earning pretty much nothing (slackers), they’ll obviously have a lower PIR.
By the way, I’m sure nobody would try this because the IRD can be scary af, but don’t try to dodge taxes by investing under your children’s names! In a great and cautionary article from Mary Holm, she talks about what could happen to someone who kept their own investments in their children’s names in order to pay less tax. It ain’t pretty (unfortunately after the new update to the NZ Herald website, I can’t find this article anymore!).
How would you actually go about doing it?
If I had a young child today and was looking at helping them with their financial future, here’s how I’d do it.
I’d probably pick a couple of Smartshares funds or use InvestNow to invest in the Vanguard International Share Exclusions fund. This is like a normal index fund but they don’t invest in cluster bombs or anything yuck.
Because I’d be investing for such a long time frame, it would be a great idea to choose a low-cost broad market index fund (like the one which tracks the NZX50 or the S&P500), as I’d maximise the long-term returns. As I’d be investing for such a long time, there’d be plenty of time for share market returns to even themselves out! Plus, index funds mean great diversification. No single company stocks for little Ryan Junior.
Smartshares requires a minimum of $500 per fund and $50 per fund a month on an automatic investment plan, so the number of funds would be determined by how much I was able to whack into it. InvestNow just requires a $250 minimum when investing. Both are good options.
I’d then continue to keep up this automatic investment for the long term. One thing to keep in mind is that you would want to be aware of when your kid would actually want to use the money.
For example, say you’d decided they’d get it on their 18th birthday, you’d need to make sure you moved some of their money out of stock investments and into safer investments (like term deposits or bonds). You could do this gradually starting a few years before they’d receive the money.
This is mainly to protect against any sharemarket crashes – just in case there was another economic crisis the year before their birthday and they got way less money.
I’m 100% on board with the idea of investing for my future kids. It’s probably one of the best things you can do for their future, and it doesn’t matter if you start when they’re the size of a kidney bean or if they’re almost a teenager already. When the time comes, they’ll be thanking you for every little bit you put aside for them over the years!
Here’s a few handy links I’ve found useful if you’d like to dig a little deeper into the subject.
What do you think? Are you or do you plan to invest for your kids/future kids?