*Pic: Finance for kids #1: It’s no fun when your parents go broke
First published June 28
Third in a new series ... financial advice from The Naked Investor. All columns are collected under Writers HERE
Today, I’m going to show you how to set your kids up financially for life, without being screwed over by the tax man or paying for somebody else’s pony club membership.
Here’s my bold statement that will annoy the crap out of a lot of parents: Don’t set up an investment plan for your kids, it’s a bad idea.
Conventional wisdom is this - putting aside some money now means little Braxton or whatever can have a great start to life. He can buy a house, start a business, or invest in Bitcoin.
Trust me, I’m an insurance salesman
Years ago, the insurance industry knew that new parents were fair game. Days after the stork landed, a smiling salesman in a cheapo suit would rock up on your doorstep, documents in hand.
He’d then flog you something called an Endowment Insurance Policy, which was meant to pay out a massive wad of cash when your kid reached 21.
In reality, most people ended up with a lump sum of about $37.26.
Those people are still around, except these days they wear better suits, and call themselves financial planners. More on that later, but for now, let me explain why you shouldn’t invest money for your kids.
Early on, kids don’t cost much. Nappies, a baby capsule, and earplugs for the parents. Even if you’ve dropped from two incomes to just one, most people manage okay.
Then the kids start hitting you up for money. Real money. How do I know this? Well I’ve owned two of them for quite a while. They never really stop draining your wallet, even when they reach adulthood.
So unless you’re earning some serious bucks, the idea of saving your Family Tax Benefit, plus the $200 from Auntie Fran starts to get difficult.
Kids are expensive. Write that on your fridge.
This is what often happens.
After 18 months, mum and dad notice the toddler’s got more in the bank than they do. So they ‘borrow’ the kid’s future inheritance to buy a 4K television.
Or they realise that kids are, let’s face it, freaking expensive. After five years of eating mince and Aldi food, they raid the kids’ investment account to treat themselves to something nice. Like a weekend away from the kids.
There’s nothing wrong doing that. It happens all the time. But it does show that for most people, trying to build a lump sum for your kids doesn’t always end well.
Here’s the next problem. Even if you’ve scrimped and saved to put aside some money for the next generation, at what age do you hand it over?
At 18, girls are starting to develop some common sense. Boys are different. Boys are generally stupid until they’re a bit older, like 28. Give an 18-year-old boy $50,000, and be prepared to see a V8 ute in the driveway the next morning.
So here’s my tip. If you’re like most families and paying off a home, forget about the kids for a while. No, I don’t mean leave them in the Commodore while you play the pokies. I mean get your own affairs in order first. Which means not having a mortgage.
Look after yourself first
If you do that, you’ve got a fair shot at giving your kids one of the best presents they’ll ever get – a financially stable home life.
Where there’s no risk of the bank foreclosing on your house. Where mum and dad (or dad, or mum, or mum and mum or whatever combination makes up your family) aren’t stressed to the gills about money.
That’s far more important than worrying about kids savings accounts or worse still, scholarship plans or nasty investment bonds.
Let me say that again. If you’ve got kids and a mortgage, then you probably shouldn’t set up a savings plan for them. Put the money into your future, and theirs. Your mortgage.
If you haven’t got a mortgage, then you’ve either paid off your house (you can skip to next week), or you don’t own one. If you don’t own your own home, then if you hope to, focus on that. If you’ve got a personal loan, car loan, credit card debt or AfterPay commitments, then go and slap yourself. I’ve got a course coming up soon just for you called ‘How to Adult’.
Children, it’s time for your powerpoint presentation
I know a lot of parents will think this is a load of rot. They’ll be the people that schedule a Thursday night meeting with their kids every month and show them how their inheritance is tracking. I reckon that’s a terrible thing to do.
Kids will change your life. Cherish them. Love ‘em to bits. But please, don’t try to make little investors out of them. They don’t want that, and they don’t need that.
And if you start showing them spreadsheets and projections at too young an age, they might end up with a boring career as an accountant.
Last time I checked, variable mortgage rates were somewhere around 4%. It’s possible they will never be this low again. So if you’re paying off a house, you’ve got a once in a lifetime opportunity to smash your mortgage.
When you’re debt-free, go and blow some money on very expensive champagne. Then you can sit down and look at how you can put aside money for the kids.
The Naked Takeaway
Next week I’ll give you the inside on how to get the correct structures for kids’ investments.
Here’s a glimpse: Australian Scholarships Group is the devil incarnate. Investment bonds are nearly as bad, and will rob your kids of any chance of investment growth. Shares are good. Family trusts are good.
If you want to take the really long view and help the rugrats plan for their retirement, you could always put money into super for them. Okay, they won’t be able to touch the money until they’re old and grey, but 70 years of compounding has worked rather well for Warren Buffett ( HERE ).
But please, sort yourself out first.
*You can follow *The Naked Investor at http://www.nakedinvestor.com.au , on Facebook and on Twitter @FinanceNaked. The Naked Investor provides education, not advice. Do your own research, you know the drill.
*The Naked Investor is known to the Editor