I want to protect my children from harm, but I also want to teach them to take care of themselves by encouraging them to be independent and adventurous. Ultimately though, I would also like to make sure they navigate this world with a safety net.
When it comes to helping them develop their independence, courage and curiosity I can only promise to “do my best”. Thankfully, when it comes to making sure they have a safety net, I can be much more specific and apply lessons based on evidence.
In life, as in investing, the key to success is usually to start early and to choose carefully. When it comes to investing for a child, a little bit can go a long way, which means you don’t have to save a lot in the beginning. If you can save consistently from when your child is born, you are sure to be amazed and delighted by the power of compounding, which is effectively a snowball effect, with growth building on the growth. Those small amounts invested today will grow into significant savings.
A tax-free savings account offers a simple, affordable way to invest for a child. It is easy to set up, charges low-fees, provides access to well diversified portfolios and – as the name suggests – offers a boost to growth in the form of tax savings. For example, if I setup a TFSA for my new-born daughter and start contributing five hundred Rand consistently each month then, by the time that she’s eighteen, the investment will be worth enough to fund a first “starter” car or university education.
As a father I find this appealing because I can harvest the effects of compounding tax-free investment returns to meet these future goals. As my child grows, so can the money that will help get her off to a strong start in her adult life one day. It’s reassuring to know that I can take little steps each month (that add up in a big way) rather than waking up one day and finding that either I can’t help, or that I’d need to go into debt to do so.
A few helpful tips to keep in mind:
As your child grows up, it is worth considering making a small investment in their name on birthdays instead of additional toys and trinkets. It almost goes without saying that saving a small amount now will have a much greater impact on their life.
You might earmark investments along the way to fund tertiary education or perhaps a ‘coming of age’ 18th birthday present. Whatever the intention, the time horizon is long-term (5 years or longer). This makes a high equity portfolio a great choice as it gives the best growth over the long term.
High equity is often equated with high risk, but this isn’t the case over the long term. Over periods of five years and longer, a high equity portfolio consistently delivers inflation-beating returns. The downturns over any short-term period will look insignificant over a long-term time horizon.
Remember, though, that compounding works both ways. As your investment grows, you must take care to ensure that fees are not taking an ever-bigger slice of your savings.
Keep your fees below 1% to make sure that your savings are working for you and your children and not for the industry. The industry average fee is around 2.5%; 10X Investments charges less than 1%. The difference will be reinvested on your child’s behalf to compound over time.
As with all investments, it is important to scrutinise your options carefully. Try to understand the underlying terms and conditions. If they are overly complex and full of jargon you don’t understand maybe you should think again and select a policy that makes sense to you and you will eventually be able to discuss with your offspring.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250).
