Having children can change your perspective on life. Priorities shift and your world is never the same.
I remember looking down at the fresh face of my newly born first child, the parental instincts welling up inside. I knew I would do anything for that boy, and I wanted to give him the best life I could. It speaks to the financial planner in me that within first week of his life, I had set up an investment and savings plan for him and he became my youngest client.
I know I am not alone with these feelings; I’ve helped many parents and grandparents with similar strategies in the past. However, sometimes the realities of life can get in the way of even our most important feelings.
Children are expensive
While we try to survive and thrive, cashflow can be a problem.
Everyone knows that children cost a lot of money. There have been many academic studies to quantify the amount. A ten-year-old study out of the University of Canberra estimated the cost of raising one child to 18 years old varied between $237,000 to $550,000 (NATSEM, 2013). Extra food, clothes, recreation, bigger houses, bigger cars. There are a lot of variables that can go into a budget. We can all agree that raising children will probably cost more than we think, and that cost is only going up.
Extra costs can be very daunting for young families. The typical Australian family will move from dual incomes to being reliant on one, at least for a time. Budgets are tighter and plans for saving and investing can easily be put by the wayside.
Making a decision early
I’d like to encourage any prospective or new parents and grandparents to start thinking about investing now. Why? Compound Interest.
Compound interest has been described as the eighth wonder of the world. The fact is that money makes money. With compound interest the more you have the more you earn from, which you earn even more from, et cetera, et cetera. The biggest guarantee of success for a portfolio will be time in the market.
A $10,000 investment compounded at a modest 7% return would result in $34,000 after 18 years. With the addition of a $100 per month savings plan that investment increases to over $75,000 after 18 years.
It is never too early to be talking about investment, but it can be too late.
What do you need to save for?
Thinking about what you want to happen years and decades in the future can be difficult to comprehend. Planning early gives you the flexibility to deal with life’s ‘what ifs’. If big expenses haven’t been saved for than when they arrive, we are in for squeezed cashflow or increased debt.
The first and biggest question will be do you want to send your child to a private school?
The cost of private schooling will vary between institution and the area you live. The average cost of private schooling in Sydney was $35,325 per year, while a regional average was closer to $11,000 per year (Hare, 2022).
Many parents like to buy their kids their first car.
Would you want to do this? Would it be an old banger, or something with more modern safety features and a corresponding modern price tag? Would you give them your old car and buy yourself a new one?
Do you want to set your child up for their future once they’re an adult?
Do you want a ‘college fund’ to help with a university education or getting a trade? University tuition can be funded by the HECS-HELP scheme, but that doesn’t cover textbooks, housing, and other costs. Would it be better to have money set aside for this so that by then you can focus on being debt free and saving for retirement?
What about housing affordability?
The huge increase in house prices in the last few years, especially in regional areas, has highlighted a growing problem of the young being priced out of the housing market. The ratio of average house prices to average household disposable income has more than doubled over the last 30 years from 3 times to 6 and a half times. Over the last 20 years the average capital city dwelling prices rose 200% compared to an 82% rise in wages (Oliver, 2021). Would you want to help your child with a house deposit when that time comes?
Some, all, or none of these things may need to be funded by you when the time comes. Without having the money there though, you won’t have the option.
Setting up your investment correctly
If you decide to invest for your children, there are several points to consider such as:
- Will capital gains tax be payable when the investment is withdrawn and by who?
- Will dividends attract income tax and who pays that?
- Do you want the flexibility to draw on funds early if plans change?
- Are there asset protection considerations?
- Are there additional costs, transactional and otherwise, for a regular savings plan?
- What is the right asset mix to be invested in and should this change over time?
- Will control of the investment be turned over to the child and at what age should that be?
I encourage you to seek professional financial advice to ensure these and any other questions are answered, and the best of intentions are implemented in a way that gets what you want.
Written by Jonathon Missingham