Putting kids on the property road
It's a good idea to talk to your kids about the advantages of buying bricks and mortar. Start while they are young and do it often. With median property prices reaching $595,000 for homes in Sydney and $565,000 in Melbourne, the chances of young adults owning property is fading. Your child needs to be fairly determined, like Money reader Ash Weeks. At 17 he wrote wanting to know how he could buy his first property.
He'd been to property seminars and watched property experts' DVDs. He was a bit disappointed when the experts told him he needed to save hard and often to build up a suitable 20% deposit.
If your child is keen, once they reach 18 encourage them to put their savings in a First Home Savers Account. The idea behind the FHSA is to help people save for their first home. The incentive is a government contribution of 17% on their savings up to a maximum annual amount, currently $5500 for the 2011-2012 financial year.
This is a lot more than the best online savings account interest rate of 6.51%. If you contribute $5500 over one year you will earn $935 from the government contribution, compared to $358 from the highest online savings account.
As an additional sweetener, interest earned in the account is taxed at a low 15%. See the tax office's website ato.gov.au including a link to a list of 18 financial providers offering a FHSA at the APRA website.
Treat an FHSA like any other account and find out where the money is invested, the fees (exit, switching, annual etc), rate of return and when interest is credited (monthly or quarterly).
Here's how it works. Ruby places $200 in savings into a FHSA every month. Her parents match this, bringing her annual savings to $4800. The government puts in $816 (17%) each year. She earns 4% interest which will be taxed at 15%.
After five years she will have $30,929 - $24,000 personal savings, government contribution $4114 and net interest after 15% tax of $2849. When she finishes university and is working she triples contributions and boosts savings. Members Equity is currently offering 5.5% on the FHSA.
Your child has to be committed to property because they won't be able to take out money from an FHSA once it is in.
Remember, these are the spending years with a long wishlist - uni fees, transport, travel, general living. But it's also a time of great opportunity to put in place disciplined saving. As well as FHSA, if there's any other money it's worth contributing $1000 to a super fund to claim the government's co-contribution of $1000 (100% return on money) if they earn less than $31,920.
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