The ultimate guide to investing for your kids’ future (2024)

I’ve recently had an influx of questions from many of you asking about investing for children, and with the pressure of the festive season over and many kids returning to or starting their education this past week, it felt very well-timed to delve into the topic further.

Investing for your kids can be a brilliant way to set them up financially when they come of age, be it funding further education, purchasing their first car, funding a gap year or helping them out with a home deposit a little further down the line.

Before we move on and dive a little deeper I’d also like to acknowledge that this might not be financially viable for you right now, and a column like this has the potential to make you feel like you’re not doing enough – so if this is you, I’d like to stop you right there.

You’re doing the best you can with the tools and resources you have access to today, and I’m so proud we’re able to have this conversation now, so you can implement something like this in the future. Accessibility to investing has increased significantly over the years and is no longer just for the wealthy – with many platforms allowing you to invest with as little as one cent!

To preface the investing options I’m going to lay out on the table for you, we first need to discuss a few things you need to know, like the tax implications involved, why I think investing trumps saving and – of course – how you can actually get the ball rolling.

While investing for your children when they’re still small and have the power of time on their side can be a fantastic way to set them up, there are a handful of tax implications you should know.

The path you choose depends on the time horizon and purpose of the investment.

While your default assumption might be to invest their money directly in their name, that can sometimes prove problematic. Why? Because minors can earn only up to $416 on investment income every year before staggering tax rates as high as 66 per cent come into play.

While this might seem wild, it’s actually to deter higher income families and parents from attempting to lower their payable tax by distributing income and assets to their children – and historically, this meant skipping out on a large chunk of tax.

Now let’s tackle the burning question many of us have – why bother investing for your child when you could pop some cash into a savings account?

Loading

Sure, regular deposits into a savings account are commendable. If you stash away $20 a week for 18 years, you’d accumulate an attractive $18,720. Not bad, right? Now, consider this: if you chose to invest that money, even with a conservative 5 per cent rate of return, you’d be looking at $29,306 after 18 years.

The magic ingredient here is compound interest, and trust me, it’s the financial equivalent of sliced bread – life-changing.

The path you choose depends on the time horizon and purpose of the investment. If you’re playing the long game with more than 10 years, you could consider an investment bond. These beauties are designed to provide tax-effective investment solutions which can be used to build future wealth without increasing your personal income tax liability.

An investment bond is an often-overlooked managed investment, usually operated by an insurance company or friendly society, where your money is pooled with money from other investors and invested in the investment options each investor chooses.

For a moderate time frame of around five years or more an exchange-traded fund (ETF) is something many people in my community turn to as a simple way to diversify their investment – because they’re easy to purchase, and an ETF allows you to invest in a wide range of companies in one transaction.

They’re a low-cost option to create a well-diversified portfolio and with an ETF, you’re able to own hundreds of Australian shares, international shares and more. If you’re thinking short term (say two to three years or less), the share market’s rollercoaster might not be your best friend. I’d consider sticking to term deposits or high-interest savings accounts for a bit more stability.

Now, let’s elaborate on the various investment vehicles tailored towards your child’s needs. We touched on investment bonds already, however here are a few more options I’ve used with clients when I was an adviser, and I see my community regularly use to protect their wealth.

1. Family discretionary trusts: For larger sums of money, like inheritances, setting up a trust can be a strategic move. You’re able to distribute income to beneficiaries (read: your kids) and let them pay tax at their personal rate. Flexibility is the key here.

2. Informal trusts: Invest in your name but designate your child as the beneficial owner. It avoids capital gains tax events upon transfer, but brace yourself for income and capital gains taxed at the child rates.

Loading

3. Superannuation: If patience is your virtue, you could consider investing through your super. You can claim deductions, and contributions enjoy concessional rates. Just remind your kiddo that it’s a long-term game; they can access it when the stars align.

4. Offset accounts: Do you have a mortgage? You could use your offset account to stash away the intended funds – especially if you don’t have a longer time frame. It reduces interest costs for you, which ultimately could leave more for your child. Just be mindful of gifting rules if you’re planning a big lump sum transfer.

I’ve said it before and I’ll happily say it again – from little things, big things grow (thanks Paul Kelly!) and in the world of investing, time is your greatest ally.

While the cost-of-living crunch might be real, it shouldn’t deter you from considering the future financial health of your kids. Yes, investing for them might require a strategic dance around tax implications, but with the right moves, you can set the stage for their financial success.

So, whether you’re already a savvy investor or not, explore the options, make informed decisions, and nurture those financial seeds for a future of abundance.

Victoria Devine is an award-winning retired financial adviser, best-selling author, and host of Australia’s number one finance podcast, She’s on the Money. Victoria is also the founder and co-director of Zella Money.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circ*mstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.