The past few days I’ve been asked, “Hi Owen, how do I invest for my children? I want to start in 2021, adding money as I go, with the hope of helping them out when they turn 18, 21 or later in life.”
I’m going to give you the simplest answer. My answer applies to parents, grandparents or siblings looking to get started with an amount of, say, $1,000 to $20,000, plus a regular savings/investment plan.
You’ll find the answer after the following paragraph:
Please note: If you’re looking to invest more money for more children (e.g $100,000, across two or more children) you should get tax and maybe legal advice to discuss whether or not you should be setting up a trust (with you as trustee) or a separate brokerage account (in the child’s name) and holding the shares for your child/children as beneficiaries. It’s important to get legal and/or tax advice on this because, according to the ATO, any child who earns more than $416 per year from a family trust may be subject to harsh tax consequences. Speak to your tax agent.
Ok, on with my simple answer…
How I’d invest a few grand for kids
Let’s say you want to invest a small lump sum today for your child’s future, adding $500 every three months in the hope of providing for them in 10 – 20 years.
I wouldn’t try to get fancy with holding structures, tax forms or trusts, I’d just identify the adult in your family with the lowest annual income (e.g. you or your partner) and open the share brokerage account in their name.
There are some downsides to this:
- Tax. The adult will pay income tax on dividends (less franking credits) and they’ll cop capital gains tax when the shares are sold.
- It’s not as clean. Some people like to separate their children’s money from their own — for clarity. Keep in mind, you can use more than one online broker (one for your shares, another for your family/children).
However, here’s why I think this simple strategy works…
You want to support the child financially, in 10 or 20 years, using the money you save and invest today.
So, if you are better off (financially) then you will have a greater ability to help them out when that time comes.
Meaning, so long as you have money put aside — whether you or they ‘own’ the shares — everyone will be better off.
This is what I planned to do for my young sister.
The following example comes from our full Rask Education tutorial: How to invest for kids in Australia
Here’s an example
Will and Georgia want to invest in some ETFs from Vanguard, BetaShares, ETF Securities or iShares for their kids, Ryan and Sarah.
Currently, Will is working and earning $95,000 as an electrician. Georgia works two days per week as a freelance journalist earning $40,000. Both kids are under 5 years of age, so Will and Georgia plan to invest for at least 13 years (i.e. a long time). And because they are investing for the long-term Will and Georgia believe they can take some risk with the money that’s invested and use low-cost ETFs and shares for compounding growth.
Using the Rask Education compound interest calculator (see below) and after getting any necessary tax advice, Georgia opens an online share brokerage account, in her name and with $500 to get started. The couple commit to saving — and investing — $500 every three months into a few ETFs and shares.
After 13 years of compounding, Will and Georgia have $38,831 set aside. At this time, they could keep the shares, or simply sell or gift them. Keep in mind, they may be required to pay capital gains tax if they sell.
But here’s the rub, even if Georgia and Will pay tax — at least they’ll have $38k, less tax, to offer their kids, if they still like them…
As an interesting hypothetical, if Will and Georgia waited 5 years to get started they will have to save $928.70 per quarter — the equivalent of 2.75 years of extra saving! — just to make up for the lost compounding.
Important notes: in our calculations for Georgia and Will, we’ve excluded brokerage fees, costs, inflation and taxes. We’ve also assumed a 6% yearly rate of return, with all returns reinvested for maximum compounding.
In summary, here are my lessons for investing for kids:
- Start now. Every day, week, month or year you delay is compounding you’ll never get back.
- Take our Beginner shares course.
- Keep it simple. You can always change strategy in a few years once there is more in the account.
- Consider how long you have to invest. The longer you have, the more risk you may be able to take. But remember, the stock market will rise and fall.
- Use a handful of low-cost ‘vanilla’ shares ETFs, particularly those which hold more than 100 shares. Earlier this week I named one of the ETFs I’d use.
- Talk to your accountant or lawyer if you plan to invest a lot of money for your children, or if you’re concerned about tax implications.
Finally, if you’re stuck looking for ETFs or shares to buy, that’s where we come in. You can join our Rask ETFs service using the coupon code “money4kids” to get 50% off.
Here’s to investing better in 2021!
Lead Investment Analyst, Rask Invest
Founder, Rask Australia