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How many of us with small children have wondered how they can safe guard their family’s financial future?
Ensuring you have enough money each week for the essentials can sometimes cause headaches for many parents, so trying to find funds for future investments seems almost like a pipe dream.
A very appealing pipe dream.
So how do families find the extra cash to put aside for their children’s future? And what is the smartest way to make your money grow to set your children up in the long run?
Contrary to many parent’s belief that they need to find big chunks of spare cash to invest, it’s all about putting aside small amounts and watching it grow in the long run, according to Australian finance commentator Noel Whittaker.
With small children, sometimes finding even the smallest amount of extra money every week can seem like a stretch, but starting slowly and being consistent is the key to watching your children’s investments grow.
While there are many options out there for parents who want to ensure the best financial head start for their children, Mr Whittaker has a few suggestions but says one of the simplest is to aim to pay your mortgage off early.
“Simply having a go at having your house paid off by the time your kids are in high school is going to give you an effective capital guaranteed return of around five or six per cent on the money invested in making extra repayments,” he says.
Using a loan repayment calculator can help you play with the amount you pay of each fortnight or month and plan your budget.
Another practical tip to achieve results when it comes to lowering your mortgage is to pay it off in fortnightly, rather than monthly instalments.
“You might pay $4000 a month, and move to paying $2000 a fortnight, so you’ll find yourself paying an extra $4000 a year without really feeling it as there are 26 fortnights a year, but only 12 calendar months in a year,” he says.
“So the easiest way is to ask the bank to take it out fortnightly, or alternatively accumulate all of that spare money in an offset account.
“We have this remarkable ability as people to spend exactly what we earn, so by adding extra small amounts to our repayments will help us in the long run, while not hindering us too much now.”
Another investment option recommended by My Whittaker is insurance bonds.
Insurance bonds, also called investment bonds are similar to superannuation in that the fund pays tax on behalf of the investor, which means there is no need to include any income in the investor's yearly tax return.
The differences between and insurance bond and superannuation are that a superannuation fund will pay tax on your behalf at 15 per cent, while insurance bond funds pay 30 per cent.
The amount you can place in superannuation is limited and your money is tied up until you reach your at least 55 years old, whereas there is no loss of access when you place your money in insurance bonds, and the amount you can place in them is limitless, says Whittaker.
“The ability to access the investment at any time is also a major feature of an insurance bond,” says Whittaker.
“Your money is not tied up for 10 years and you can withdraw all or part of the balance whenever you wish. If you do withdraw your money early, the profits will be fully taxable, but you will be entitled to a 30 per cent rebate to compensate for the tax already paid by the fund.”
A Child’s Advancement Investment Bond in the name of either the mother or the father with the child as the life insured with a nominated vesting age, is Mr Whittaker’s recommendation.
“When a person takes out this type of policy, it is customary to nominate an age when the policy will automatically vest in the name of the child. This can be at any stage between 10 years and 25 years of age, but if no age is nominated it automatically passes to the child at 25,” he says.
“These are an easy option and if you invest in your name only as the money grows you’ll be paying more tax than if you invest in your child’s name or as a trustee in your child’s name. It is just a nice easy option.
“Investing small sums to start is the way to go and remember that by its nature compound interest starts slowly and goes faster as time goes by.”
“Because these sort of investments start slowly most people say it’s too hard, but like weight loss it’s sticking with it for the long term that works.
“Hanging on to your money and accumulating more, well that’s the whole secret to wealth,” he says.
Looking at compound interest calculators and working out different rates will also help people plan how and where to invest their money, Mr Whittaker says.
“That’s just the way the numbers work, how much you have at the end of the year, depends entirely on the rate,” he says.
“Essentially the key is to start early and let the compounding work its magic.”
Investing in your child’s future at a glance
- Aim to pay your mortgage off earlier by changing repayments from monthly to fortnightly.
- Direct a small amount of extra cash into your offset or mortgage account each time you’re paid
- Invest in insurance bonds and reap the benefits of compounding interest.
- Small amounts can go a long way when compounding interest is applied.
- Start investing for your children early.
- Open a high interest bank account for your children and deposit small amounts regularly. As they become older, encourage your children to add to this account.
- Do your homework and don’t invest in any funds or opportunities that aren’t transparent.