Investing at an early age is important – particularly since future generations may have to rely on their own investments to fund their retirement, rather than accessing a Government pension. Getting into the property market or purchasing a first home is becoming increasingly difficult for younger generations so the other main reason people want to invest for their children is to assist in or fund a house deposit.
The effect of compounding means the earlier you start investing for your children, the easier it is to create wealth. So it makes sense to help our children start the wealth creation process at an early age.
Outlined below are investments that can be used to give your children a financial head start:
One of the most simple and effective ways to give your children a financial head start is to invest your money through a managed fund using a savings plan.
Managed funds offer almost unlimited investment options, and allow you to make small, regular investments over time. You can start with as little as $1,000 adding an additional $100 per month.
However, if you elect to use a managed fund for education savings, consider investing in your name rather than your child’s name. In most cases, investing in the name of a child is inefficient for tax purposes, as penalty tax rates apply to ‘unearned’ income for minors (people under the age of 18).
Did you know that you can make superannuation contributions on behalf of a child aged under 18?
The contributions are classified as undeducted contributions (so no tax deduction is available) unless the child meets a work test. However with the benefit of compounding, a relatively small contribution at birth can grow into a significant nest egg by the time the child reaches retirement.
For example, if you were to contribute $1,000 per year from birth to age 16 (a total of $16,000), by the time your child reaches age 60 the nest egg would have grown to $66,595 in today’s dollars (assuming inflation of 3% and a gross 7% annual return).
If a more high-growth investment option were used – as would generally be advisable over such a long-term investment time frame – an annual gross return of 10% would see a balance of more than $250,000 at age 60. A very handy head start for retirement!
If you would like to invest to create a nest egg for your children, your Count Adviser can offer invaluable advice to put the power of compounding to work for your family.