It’s natural to want the best for the children in your life, whether you’re their parent, step-parent, carer, aunty, uncle, grandparent or even godparent.
And, while money won’t be the be all and end all when it comes to raising happy little humans, you’d probably agree a little extra dough wouldn’t go astray, particularly when considering things such as childcare, education and the cost of living in Australia.
In fact, according to the last AMP.NATSEM Cost of Kids Report, released in 2013, bringing up two children was estimated to cost around $812,000 for a typical middle-income family, up from $537,000 in 2007, and almost double that of the first report, released in 2002, when it cost $448,0001.
With evidence suggesting costs are only likely to escalate further when it comes to what you fork out on your kids, you might be thinking about some potential ways you could invest and save for their future, bearing in mind there are risks attached to investing, as returns aren’t always guaranteed.
Where might I put my cash?
If you’re thinking about putting money aside, with the hope it might grow in value, so you can potentially do more for your kids (financially) down the track, below are some things you could invest your money in directly, and various vehicles through which you could also hold such investments.
Meanwhile, depending on who’s name you put the investment in (you or your child’s), there may be tax and other implications, so ensure you’re across what these are before making any decisions.
If you put money into cash investments (for instance, a savings account or term deposit), the returns will often be lower in comparison to other investments, but they will typically provide stable, low-risk income in the form of regular interest payments, which could add to what you’re able to put away.
Shares and equities
If you purchase shares (also known as equities) in domestic or international companies, you’ll essentially be buying a piece of that company, making you a shareholder.
If the shares in the company that you own grow in value, the value of your investment will also grow, and you may receive a portion of the company’s profits in the form of dividends.
However, if the share price falls, the value of your investment will fall too. And, it’s also worth keeping in mind that you may not receive any dividends at all.
If you’re considering putting your money into some type of managed fund, your money will be pooled with other investors, with a fund manager investing in a range of assets for you. This might include a mix of cash, shares and property for instance.
Your investment will be equal to a set number of units and anything earned and any growth will be divided between all investors depending on how many units each investor owns. Meanwhile, income generated from managed funds will be subject to tax based on the individual income tax rate of the owner.
Because investment returns are tied to movements in investment markets, it’s important to keep in mind that putting your money into a managed fund won’t necessarily guarantee you an income.
Similar to a managed fund, if you decide to put money into an investment bond (also known as an insurance or growth bond), your money will generally be pooled with money from other investors, with an investment manager making the day-to-day investment decisions.
What makes an investment bond different however, is in the way that earnings are taxed. Plus, there may be tax benefits where an investment bond is held for at least 10 years, so they’re often seen as a type of investment-savings plan for long-term investors.
If you pay a higher rate of tax on your income, an investment bond could be a tax-effective way to invest and save for your child’s future or education, with the ability to transfer the policy to the child, at a certain age, often possible.
An education bond is similar to an investment bond, and may also be a tax-effective way to invest for your child’s future and potentially make certain educational expenses tax deductible.
Generally, anyone can make contributions into an education bond, and while funds are typically invested for education purposes, it may not be mandatory, however there could be tax implications worth considering.
The pros and cons of different products
Choosing the most suitable investment product when it comes to saving for your child’s future may depend on a range of factors, so keep in mind the following things when weighing up your options:
- Potential interest rates and any fees that may be payable
- How easily your funds are accessible
- How often contributions may need to be made and whether others can pitch in
- Whether different investment options are available and how they vary
- What level of risk you might be taking on and how comfortable you feel about it
- Whether there are any legal and tax implications worth knowing upfront.
Other things to think about
You could have other debts that may be worth paying off first, such as your mortgage, or there may be greater tax advantages to putting money away for your retirement.
Where to go for assistance
If you’d like to know more about your options and where advantages and disadvantages may arise, speak to your financial adviser. And, if you don’t have one, contact us on 03 6343 1007.
In the meantime, if you’re interested in seeing what investments AMP has to offer, check out our product info page.
1 AMP.NATSEM report Cost of Kids – page 2
Online source: Produced by AMP Life Limited and published on 22 March 2018. Original article.