Ask Paul: How can I invest for my young daughter?
I have a few thousand dollars in a bank account on behalf of my eight-year-old daughter. It is earning hardly any interest each month. I'm thinking about investing it into an exchange traded fund (ETF) with a company like Vanguard to get better returns. How do I do this? Do I have to contribute regularly to make it worthwhile?
Can I hold it on her behalf? Or would a term deposit be a better option? Can parents hold term deposits for children and what are the tax implications? - Jolie
I am always delighted to get questions about investing for our kids and grandkids, Jolie. This is not a technical discussion for me. My dad and mum did this for my sister and me. They put a few dollars into shares for each of us in most years, starting when I was born in 1955.
As it turned out, in later years they were able to fund our school education out of their earnings. Then Gough Whitlam came along and, bless him, university fees were basically zero.
Because Dad and Mum held the shares as trustees for me and my sister, they were also able to deter us from using the money to pay for cars or a holiday. In my early 20s I do recall seeing this as a bad idea. I was quite convinced the money could be converted into a lot of beer.
But sanity happened, basically due to the wisdom of my parents, and I found myself as a 29-year-old with the shares still intact. Twenty-nine years of compound returns in, say, a term deposit would have been absolutely hopeless, after tax and inflation - pretty much of no real value.
But the very small, regular amounts put into shares had turned into some $40,000. Vicki and I had just married, and she had a secure job as a teacher. So, we used $20,000 as my contribution, along with the same amount from my four partners, and we started our business
The other $20,000, along with selling Vicki's Datsun 120Y, gave us the deposit for a small semi-detached home, bought for $90,500. We were on our way. And all thanks to my parents, who thought about our future and put a little aside each year.
Sorry about the diversion, Jolie, but it may help to understand my passion for investing small amounts for the kids, every year, from the year they are born.
Now to you. First up, forget term deposits. These are a terrific, super-safe investment for ancient people like Vicki and me. We keep about 10% of our investment portfolio in them.
My long-standing view is, that after you start to slow down your work, hold about three years' income needs in cash. That way whenever markets fall you use your cash to eat, not sell shares and property in falling markets.
Term deposits are an appalling investment for the long term. Inflation and fully taxable returns just kill them.
Your idea about an ETF is a great one. Vanguard or similar low-cost firms like BlackRock are a great way to invest for your child and make extra contributions. Have a chat with them, they will be very pleased to help you get set up.
Here you will have to excuse my total bias. But I think it is worth mentioning; we do this for our grandkids. First up, I want to let you know that I am chairman of this firm, own shares in it and have investments with it. But I think this is a ripper idea.
InvestSMART has a regular investment plan called Fundlater - look it up online. We investors put in an initial $4000. I appreciate this may take some time to build up.
We certainly could not have done this for our three children when they were born, but now we are in a position to do this for our grandchildren. What I love is that Fundlater then adds another $6000, making it an investment of $10,000. Then we investors make a monthly payment of $325 for 20 months and we have paid off the unsecured loan from InvestSMART.
You can choose from three diversified, low-cost ETF portfolios. There are no interest charges; the $325 a month includes $25, which is the fee for the $6000 loan.
This may not be for you, but for younger people looking to get a start as an investor, and parents or grandparents looking to invest for children, it may be worth a look. Please do, as always, read the investor information before you consider investing.
Frankly, doing something is the most important thing here, and I am less concerned about how you invest for kids or grandkids. Any low-cost growth investment option, with a low-cost, reputable manager, is just fine with me. Most likely you will need to invest in your name, as trustee for the kids, meaning you pay tax on untaxable income.
The real point, though, is the long-term opportunity you will build to pay for education, provide a home deposit ... or in my case, 29 years later, a small home deposit and capital to start my business. That is life-changing.
Correction: an earlier version of this article incorrectly listed the Fundlater repayment as $320 a month including a $20 fee, with a choice of four investment options. The repayment is now $325, including a $25 fee, with a choice of three investment options. The article has been updated to reflect this.
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