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Three ways to give your children a financial head-start

And get them thinking the right way about saving.

Many parents find it very difficult to talk to their children about money. Either the topic is seen as too sensitive or they just feel that they don’t know enough to give good advice.

However, the worst lesson that any parent could ever give a child about money is not talking about it. Children learn the most from the example that they are set, and that is why it is so important to show that money is not something to be scared of or anxious about it. It is something that should be made to work for you.

This is why it is best to expose children to the idea of saving sooner rather than later. From a young age they should see that they can have control over their money.

Here are three easy ways to get them thinking the right way about saving:

Give presents that mean something

Of course children love toys and having something to play with, but not every present they receive has to give them instant gratification. Putting money in a unit trust or stock broking account might not sound like the most exciting gift in the world, but it can be very rewarding.

For a start, it gives them some sense of having their own savings and some money of their own to look after. Over time, it’s also the best way to teach them about different savings products, asset classes, and things like interest and dividends, as they can see for themselves how they work.

A low-cost online stock broking account could even allow them to make their own decisions about what stocks to invest in. At an early age their decisions are not likely to be influenced by rigorous analysis, but they can still invest in companies that they know something about.

For instance, if they like eating at Spur, why not show them that they can actually buy a part of that company? Or if you always do your shopping at Pick n Pay, let them buy the stock. Over time, the likelihood is that their interest will grow in how these businesses work, how they generate earnings, and what being a shareholder means. This will eventually lead them to making more informed decisions about their investments.

Involve them in their own savings

If you are saving for your child’s education, are they aware of it? Do they know that you are putting away money every month, where it is going, and what it is for?

Explaining to your children that you are saving for their future allows for you to have a discussion around why it’s important to do this and how it works. Not only will this give them some sense that they can’t just take things for granted, but it also gets them thinking about the importance of financial planning.

Think of their future before they do

The earlier your children start saving for retirement, the less they will need to save. One of the biggest impacts you can make on their future financial well-being is therefore to start for them.

Plan to present your child with a lump sum on their 18th or 21st birthdays, either in their own tax-free account or placed in a retirement funding vehicle. You may not think you are contributing much, but just R10 000 will grow to nearly R1 million over 45 years at a compound growth rate of 10% per year. That is a worthwhile boost to their future retirement, and will also get them thinking about their financial future as soon as they enter the working world.

If you do this in a retirement annuity (RA), they will not be able to access the money until they are at least 55, which will ensure that it is kept for what it is meant for. However, if you believe that they will be disciplined it makes more sense to use a tax-free savings account. This is because over such a long period the benefits of a tax-free savings account will likely be greater, and you can also invest fully in growth assets like equities, while an RA will have to meet the restrictions of Regulation 28.

As with all savings, the earlier you start planning for this, the better. If you put away just R100 every month from the day your child is born, you would have saved R21 600 by the time they reach 18. If this portfolio grows at 10% per year, you could present them with over R60 000.

It is possible to do this through a tax-free savings account from the start, as you can open an account in your child’s name. It doesn’t, however, make as much sense to open an RA for them while they are still children, as nobody will gain any benefit from the tax deductible contributions. If you want to give them money in an RA, invest in a unit trust until the point where you want to give them the lump sum, and then transfer it into an RA once they are income-earning adults and will benefit from the tax deduction.

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Whilst my 2 kids were growing up I put aside annually amounts that I could afford into mutual funds in each of their names. When they started working I encouraged them to buy more units themselves. They both could not gain access to the funds until age 25 which by then was quite a sizeable amount which was adequate to cover the deposit on their first houses

I think this article lacks some fundamental issues. Your children will need a car, house and will have children of their own. To be paying money into something that will payout 45 years down the road may be a good thing BUT all the trials and tribulations that come along the way need money they can put their hands on. This country’s population already has a VERY HIGH debt to income ratio and it’s killing the parents. Just the other day there was an article about parents not affording school fees. So this article sounds nice. One day reality comes knocking. They need Financial Fitness. P.S. What will your 1 million be worth in 45 years R 15,000 so please use real numbers

I beg to differ. If the idea is “..to give your children a financial head-start” then the article is on point.

E.g.
If you use an RA for your child then (assuming the child will have a job) the child will have enough money in the pocket that would have gone into their own chosen RA.

Finally, pardon the repetition, the idea is to help (head-start) and not solve all their future potential financial problems.

Agreed. Also, long-term equity returns including dividends are in the region of 15-16%, thus CPI+9%, so the 10% growth is probably justified in real terms. However, R10k at 10% over 45 years is closer to R730k than R1m.

I too beg to differ and am of the opinion that an RA is a long term commitment – it attracts fees and legislation can change its outcome in a heartbeat – you only need to look at the “old order” read ridiculous fees to see what devastation it has wreaked on those that thought the RA was going to be their Valhalla. I am getting better returns on my LA (over last 6 years) now that I have converted the RA than I got when it was an RA. The big insurance companies really BS you with their returns and loved to show how your wealth would grow with a net 10% and 15% capital growth rate. There are many pensioned people who are thoroughly disappointed with their converted RA to LA. So given the situation in this country and its economic disposition who really know what value your RA will have in 40 years time – it may be more prudent to buy EFT’s through a Tax Free account

And what stops them from changing the tax free accounts grahamcr?

Don’t let your own bad old RA experiences blind you, one can have an RA with index unit trusts (which are very similar to ETFs). Not that your idea is wrong either, why not have both? A properly diversified R100 000 RA will be worth something in 40 years from now, it will be worth R0 if it doesn’t exist and was all spent on shorter term goals. Imagine if you start it when they are born, doesn’t even have to be a lot per month, some RAs can be started at a measly R500pm, then at age 18 it’s a R100 and something thousand, or maybe even R200 000 from growth, then another 37 years minimum for it to grow.

Look at any online retirement calculator, and pretend to retire and age 60 vs 65, see how much that capital can grow in that last 5 years just due to compounding.

supersunbird – I have to dwell on the old order RA because that is what was peddled and available at the time, so with my RA on converting to an LA the growth has come over the last 6 years and not from the 35 years of having the RA and escalating the monthly premiums annually. Over the window period of 35 years all big green managed to achieve was an internal rate of return of 5.5% hardly wealth creating in my opinion. So forgive me if I am prejudiced against RA’s in general, and more so against the people who do the forecasting – their crystal balls are a myth unless they are part of their anatomy

Generally agree. Unless one has wads of cash as a parent most should not be looking much beyond a tax free savings account for tertiary education; probably offshore education given guvmunts educational de-colonsied stance.

Absolutely no way should one go the RA route in SA for kids even if you can afford it. The political risk is too great.

The point on involving them in their own savings makes more sense. It creates and cultivates a long lasting culture in the children’s minds. This is how important habits are promoted across the board…Involvement!BUT I would rather teach them how to invest as well, than just depositing cash into a certain account and let it lie there for years whilst others are enjoying good returns on their money.

I’m a 19 year university student. I have recently got a part time job during the holidays.i want to start investing and start buying shares or stock & i have no clue about buying shares. are there any shares that i can invest in that you can recommend me that i can start with?

regards
mpho

Mpho one of the most affordable ways to invest is through Unit Trusts. My preference is Foord but Investec are also good. Look for funds that sound ok to you and beat benchmarks. High risk doesn’t always pay off.

Leave buying shares until later down the line because the costs incurred can be high as a proportion to your starting capital.

@mpho, only advice i can give you is not to seek advice on forums likes this. if you do, make sure you do your research before you dish out your hard earned cash.

I’ll an EFT. If you are building your way to a portfolio a TFSA with EFT is a good option. ETF’s give you a good sense of what a diversified portfolio could look like.

*ETF (auto correct!)

This is a definite, I am a father of 2, 47 years old with a daughter on university and a boy in grade 6. as I am no financial wiz or even a parent who saved for kids education. (Nobody to blame but myself!) Today I reap the consequences, made by my wrong choices, lost everything and starting all over. Luckily I did teach them the value of money, brands is not everything, and I-phones don’t make friends.

For my boy I opened a savings at Capitec Bank, got him a bunch of “chance bank bags” and made him safe all the change, take him to bank when its R50 in change, that’s almost every 2weeks now, and do his own deposits, get his “saldo” from the ATM and let him see how his money grows. Birthdays he as for money and not presents to deposit – when he wants to buy something expensive he must safe to get it, takes him 2 to 3 months to safe for something, than by that time the craze is over, and it start all over again – safe to buy, than forget about it, balance just keep growing.

Educate and teach the value of money to children. Safe for education, never say later, I am proof of what you should not do! its never to late to start, even a simple small change savings account can jumpstart a kids financial future. It all start with education and perseverance.

End of comments.

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