Planning for a Child’s Future
One of the greatest gifts that a parent or a grandparent can provide is to set money aside for a child’s future.
Introducing the child to the advantages of prudent savings and disciplined investment, whether this is from money gifted to them at Christmas and birthdays or earned by them through after-school and casual work, can be fundamental at that early stage in their life.
An initial small investment, when combined with regular additional contributions is able to use the phenomenal power of “compounding interest” to grow over time, providing a significant asset and long-term benefit for the child’s future.
By structuring this savings plan appropriately you are able to retain ownership and maintain control of the investments until you are ready to transfer the asset into the child’s name in the most tax effective way. This also gives you the ability to access the money before the child reaches 18 should this be required for expenses such as: school fees, sports equipment or other necessities.
Savings vehicles that can be used include Savings Accounts, Term Deposits, Direct Shares and Managed Investment Funds. Which of these investment vehicles would be appropriate for you will depend on a number of factors, including your risk tolerance, your investment timeframe, the purpose of the investment and your financial situation. While investing in a Savings Account or a Term Deposit may provide you with capital guarantee (if invested in one of the Deposit Taking Institutions authorised by the Australian Government), investing in Direct Shares and in a Managed Investment Fund may also provide capital growth over a certain period of time.
George and Elizabeth decided to commence a Regular Contribution Plan for their newly born grandchild, Adam.
If George and Elizabeth establish a Savings Account with a Bank and contribute $200 per month for the period of next 18 years, the estimated value of the investment would be approximately $70,000 when Adam reaches age 18.
In comparison, if George and Elizabeth establish a Managed Investment Fund and contribute $200 per month for the same period of time, the estimated value of the investment would be just under $120,000 when Adam reaches age 18.
There is no doubt that this amount of money will give Adam a head start in the early stage of his adult life. Adam can use the available funds to meet education costs, towards a deposit on his first home or he can continue to save and accumulate wealth.
With education fees costing thousands of dollars over school and university years, it’s no wonder people start saving for their children’s education early. The challenge is to ensure that this very important investment is both tax-effective and flexible enough for your needs. The most suitable option will depend on a range of factors such as your tax position, the child’s situation and how and when you need to access the investment.
What seems like a straightforward decision can often be complex and therefore it’s worthwhile seeking financial advice before making any decisions. Please contact your Fiducian Financial Planner to determine the most appropriate investment option for you and your family based on your circumstances.