Kids usually have several years before they face any significant financial commitments. Investing requires time to grow your money, and kids have this time on their side. They can ride out any volatility you get from investing in riskier but potentially higher return asset classes, and they have time to take advantage of compounding returns year after year.
The earlier in life they start investing, the better. This advantage alone should be enough reason to invest for your child, rather than combining their investments with your own account. They just need to have their own IRD number.
Unfortunately financial education is pretty limited in schools, so it is up to parents to teach their kids about how money works and how to use it responsibly. Giving them ownership of money through their own accounts should hopefully make them more engaged and interested in learning. The more they know now, the less likely they are to fall into crippling debt and the hands of payday loan sharks in the future. Not all services e. Hatch allow accounts for under 18s. A good investment service needs to support this, by allowing you to make small contributions.
Low fees — Low fees are important for adults as well, but are especially crucial for kids, given they are likely to have smaller balances which means fewer dollars to offset any account fees. Control — Only a few super talented kids have the knowledge and maturity to make sound decisions on their investments, so a good investment service should allow their parents to control the account, while allowing you to transfer control to the child once they are old enough.
Bank accounts are easy to understand for kids, keeps their money accessible, and earns them a little bit of interest. For example, saving for a toy, gadget, or building up savings to make a larger investment elsewhere. Some even chuck in some extras to help kids save and learn about money such as:. The three levels of control are generally:.
Term deposits used to be a solid, low risk way for locking up funds for the future. Equity funds funds that are invested in shares are probably the best long-term investments for kids. For example, an investment in the NZX50 ten years ago, would be worth more than triple today! In addition, funds give you a well-diversified investment, are easy to access and manage, and require low contribution amounts. InvestNow allows you to attach child accounts to your own account, so you can have full control over it, but can unlink the child account once your child is ready to be responsible for their own investments.
Which fund? You can hand over control of the account to your child at a nominated age between 18 and Sharesies is an amazing fund platform because they probably have the best user interface, and they allow you to invest as little as one cent. Keen to start building your investment portfolio with Sharesies? Simplicity offers some excellent diversified investment funds containing a mix of global and local shares and bonds all in one fund , at a low management fee of 0.
There are two types of trusts: bare trusts, which give the children an absolute right to access their money at the age of 18, and discretionary trusts, which allow trustees to decide when and how much to pay out. It is perfectly possible to save money into your own ISA for your children, if you are not using all of your allowance yourself. The disadvantage is that although the money will receive the same tax breaks while it is in the ISA , there is no way to transfer the money to the child without it leaving the ISA wrapper and losing its tax-privileged status.
Also bear in mind that your child has no automatic legal right to the money and this could cause problems in the event of death or divorce. More than two-thirds of the , Junior ISAs opened by parents tend to be the cash variety. However, this may or may not be the best decision. Because interest rates are so low at the moment, it is difficult to find cash accounts that pay interest of more than inflation. This means that effectively, you could be losing money in real terms every year.
Investing in stocks and shares, for example through a FTSE equity tracker or an actively managed fund , gives you the chance of growing your money faster. There is of course a risk that you will get back less than you started with, which is what puts many people off.
However, history suggests that the chance that the stock market will be lower than it is now at the end of 18 years is a very small one. Some financial experts argue that as the child approaches her 18th birthday, you should move the money from stocks and shares to cash so that it is ready to be used if necessary. This also reduces the risk that a big stock market crash just before your child turns 18 will reduce the money she might need for her future.
This article was originally published in April and has since been updated to reflect new taxation allowances. Pensions Tax Planning Strategy. Related Topics Investing for children. Leave a Reply Cancel reply Login to comment.
If your kids college accounts are already funded, and the child is working a job, get that Roth IRA going. What a legacy to provide for your child. Another possible route for investing for your kids is a CD ladder. When implementing a CD ladder, you simply purchase multiple certificates of deposit with varying durations and usually interest rates. This will result in having several CDs that mature at regular intervals.
You can repeat this process as long as you wish to keep the money in savings and keep the money generating interest. Often times, individuals will use CD ladders for emergency funds or money they are saving for a down payment on a home. You might think of these accounts as essentially custodial accounts that are non-retirement accounts.
UGMA accounts are typically used for cash, stocks, mutual funds, bonds and insurance policies where an UTMA account can also include any type of asset such as real estate and other items. Earnings on these accounts are subject to federal income or capital gains like any brokerage accounts. When is an UTMA account appropriate? Then, when you deem the time is right, you can give this money to your children.
In order to open a brokerage account for your child, first you must determine the type of account you want to open. Next, you need to choose the broker. Schwab, Vanguard and Fidelity have been pretty much leading the way with low cost investment account options. Check out each of those and talk to a representative if you want to do some more research.
The Intelligent Portfolio offering is applicable to custodial brokerage account. Next, fill out the appropriate paperwork and open the account. At most of the larger brokers, this can be done entirely online now. Lastly, determine what you want to invest in! Now what? What are the actual best investments for kids that you should be selecting for the account? And by the word investments, we mean specifically, stocks, bonds, etc. Before making major moves, read some of the books listed at the bottom of this article on the basics of investing.
The three-fund portfolio essentially aims to provide broad, diversified exposure to US stocks, US bonds and international stocks. You can get super low-cost ETFs and accomplish a very diversified portfolio that performs very well historically by just buying three simple ETF funds. Here are examples at the three large brokerages:. Again, the three-fund portfolio is a really nice place to start. For example, the accounts I have for my kids request that I simply allocate a percentage of the account to an aggressive, semi-aggressive or conservative allocation.
If your kids are young, aggressive makes sense. Additionally, many brokerages offer target date funds now. This fund will automatically adjust the allocation inside the fund towards a more conservative allocation as the target date approaches. These accounts will manage the rebalancing and asset allocation for you based on your answers to a few questions about the account, your goals and your tolerance for risk. By and large, when it comes to our kids, the timeline is quite long.
Therefore, you can be heavily allocated to stocks equities. There are some excellent beginner investing books you should consider reading with your child once they are old enough. Here are three examples:. Then, read it again with your kid. You can click here to buy it.
This book is crucial for learning about simple asset allocation. Another advantage of JISAs is that the cash inside them is automatically transferred to an adult ISA when the child turns 18, meaning that any interest from this money remains tax-free. By contrast, the same amount in a regular savings account would begin to incur tax on the interest when the child becomes an adult.
And as we all remember, that is not always the best age to have a large lump sum to hand. Anyone can pay into the JISA although a parent or legal guardian must set it up and funds cannot be withdrawn until the child turns As an added bonus, JISAs can be held concurrently with an adult ISA between the ages of 16 and 18, giving the child an boosted tax-free allowance for two years. CTFs were launched in as a way to encourage parents to save for their children from birth.
They can be useful for teaching children financial housekeeping as the child is given access to the account at age seven and can pay in and out of the account as they grow. However, regular accounts tend to have lower savings limits than JISAs with many providers slashing interest rates if deposits exceed a certain amount.
As with adult savings accounts, cash savings notice accounts and fixed-rate bonds for children often offer better rates of interest than regular accounts. Many also allow you to save more than a regular account or JISA does, making them a viable option for those who wish to put more away. Carrying notice periods of between one and five years, they also serve as a middle ground between instant access and JISAs for those who need the option to use the funds earlier.
Child SIPPs allow parents to pay into a pension for their child from the moment they are born. As mentioned earlier, SIPPs are incredibly attractive if you are the kind of person who really enjoys planning ahead and you want to help your child enjoy their twilight years.
Like all pension plans however, they cannot be accessed until 55 at the earliest. There are two types of trusts: bare trusts, which give the children an absolute right to access their money at the age of 18, and discretionary trusts, which allow trustees to decide when and how much to pay out.
It is perfectly possible to save money into your own ISA for your children, if you are not using all of your allowance yourself. The disadvantage is that although the money will receive the same tax breaks while it is in the ISA , there is no way to transfer the money to the child without it leaving the ISA wrapper and losing its tax-privileged status.
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