Ask Paul: Where should our teenage son invest his savings?

Dear Paul,

My 15-year-old son has just started his first job at a supermarket working from six to 12 hours a week (earning $130-$270 a week).

As he is under the threshold for getting superannuation, I was looking at opening a Student Super account.

I was going to get him to make a personal contribution of $10 a week - there are no fees under a balance of $1000, so it will take two years to get to that.

Would he be eligible for the co-contribution from the tax office if he does this? So, my son puts in $520 a year and the Australian Taxation Office matches it? 

I would not have any insurances initially for him, but as he got older he would take those out within super. He is aiming to save at least 80% of what he earns (for a car in two years) and put $10 a week into super with the balance for spending. 

He owns shares that my husband and I set up for him. He only has $1200 worth in the iShares S&P 500 AUD exchange traded fund (ETF), but they are doing okay. We also set up an investment bond, which he will receive at 22. 

In terms of the money he saves, is he better off putting this into shares for the short term or just leaving it in the bank for two years earning basically nothing? 

I really need some guidance and hope I am helping to set up our kids financially as my husband and I are very late getting our finances in order and want to make it easier for them. - Kylie

Something I find incredibly positive, Kylie, is the number of questions I get about helping kids plan for their future and teaching them the key rules of money.

A few decades ago, I rarely got a question about this, but today it is one of the most common. Giving kids a helping hand for the future, but also equipping them with the skills they 
need to navigate the complex world of money, is just critical.

I also had a powerful and positive money experience because of the actions of my parents when I was a youngster. It was quite an unusual thing to do back in the 1960s, but they bought small quantities of shares for me and my sister.

As time goes by, compound returns do the work and in my mid-20s I had a helpful sum of some $32,000.

This, along with some savings we had, allowed my wife and I to put down a deposit on a small semi-detached home, and to invest $20,000 as my share in a business, ipac securities, I started with four friends.

A life-changing amount

This money was life-changing for us. Buying our first home put us on the property ladder. The business took a couple of decades to become successful, but when we sold it after about 27 years of enjoyable but very intense work, it put us in a position of financial independence.

This would have been very unlikely to have happened without parents who valued education and understood that a relatively modest amount of money could make a big difference to a young adult.

I should say that I do understand the importance of a car to a young lad. Here I was also lucky: in about 1978, when I was 23, my parents passed onto me a 1968 Datsun 1000. A glamour machine it was not, but it was hugely reliable.

The plan is to save 80% of what your son earns and put $10 week into super. This is a modest amount and I agree with that idea. Super at my age is such a great asset. I'm 69, so I can draw on my super tax-free. Inside my super fund, my investments enjoy tax-advantaged treatment.

Obviously to get to a good balance, you need to start super as early as possible. In terms of a co-contribution, the government will add 50 cents for each after-tax $1 added to super up to $500.

Super will be locked away

But the problem with super for a youngster is that it gets locked away.

For your son, this is likely to be for 50-plus years. I have no idea what the rules will be in half a century, and while he doesn't pay tax on his work income because he's under the threshold, super is not that powerful for him.

Getting him started is fine, and you are looking at a fee-free fund until he reaches $1000, which is a good plan. Far too many young Australians have started super, then lost the lot to fees and insurance.

With insurance, I am not keen on this for youngsters - I just don't see the benefits.

With his part-time job, income protection insurance is not useful, even if he could get it. Death insurance is a complete waste of money. If something dreadful were to happen, he has no debts and lives with you, so what is the point? I think insurance will only be necessary at a much later date.

Finally, we come to investment for his savings.

This is a bit of a tricky one due to the timeframe. If he buys a car at, say, 18, that is only three years away. History shows us how volatile shares can be; in the short term, a drop of 30% or more is common.

So, with a three-year view, a high-interest savings account makes a lot of sense. Or if you have a mortgage with an offset account, you could put his savings into that and pay him the 6% or so that you save in interest.

Learn about investing

Another thought is that if he were to pop his savings into something like a low-cost, share-based ETF, he would get experience as an investor. With the small amounts we are looking at here, it is the money experience that matters - it is all about creating good habits.

The learning experience is more valuable than investment returns at this stage in his life.

I can only lay out the options; it is for you to discuss these with him. One thing I can say for sure is that these discussions will really improve his financial literacy. That is the key for his future. Those who understand money do well with money.

It has been a real pleasure for me to answer your question. Giving our kids and grandkids the knowledge to deal with money and money issues is one of the most valuable skills we can pass on to them. It reminds me of the adage, 'Don't give people a fish, teach them how to fish'.

That is exactly what you are doing.

Please pass my best wishes to your son. The knowledge and money habits you are helping him to develop will, if he continues with them, give him the joy of future financial independence.

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