Securing your children’s future is a top priority, and in New Zealand, there are several smart investment strategies you can leverage. From KiwiSaver to investment funds and property, understanding the options and getting started early can make a significant difference in their financial well-being. This article provides a detailed guide for Kiwi parents looking to invest wisely for their kids, offering practical advice and insights specific to the New Zealand context.
Why Invest for Your Children?
The primary reason to start investing early for your children is the power of compound interest. This means earning returns not only on your initial investment but also on the accumulated interest over time. Starting early allows your investments more time to grow exponentially. For example, if you start investing $100 a month for your child at birth, assuming an average annual return of 7%, by the time they turn 18, they could have a substantial sum significantly larger than the total amount you invested. This head start can provide them with a solid foundation for education, property ownership, or launching their own business.
Another compelling reason is to mitigate the rising costs of education and living. University fees and accommodation expenses are continuously increasing in New Zealand. Tertiary fees for domestic students are typically between $7000 and $9000 per year, excluding living costs. Investing early can help offset these expenses and reduce the burden of student loans. Similarly, the deposit required for a first home is a significant hurdle for many young adults. Building up a substantial investment fund can provide your child with a down payment, making homeownership more accessible. Finally, starting early teaches your children about financial literacy and responsibility. By involving them in the investment process as they grow older, you can instill valuable financial habits that will benefit them throughout their lives.
KiwiSaver for Kids: Early Bird Catches the Worm
Did you know you can enroll your child in KiwiSaver from birth, even though they won’t be eligible for government contributions until they turn 18? While they cant access the First Home Grant or KiwiSaver funds for a first home until they’re eligible, the KiwiSaver investment can continue to grow significantly between birth and the time they are allowed to access the funds. From enrollment the savings can grow through investment returns and parent’s contributions.
How it Works: You can open a KiwiSaver account for your child through a KiwiSaver scheme provider like ANZ, ASB, BNZ, or Simplicity. You’ll need to provide their birth certificate and your identification. As the parent or guardian, you’ll manage the account until they turn 18. You can then contribute regularly or make lump sum deposits. Remember, because the point is to get them a bit of a head start, you still want them to join KiwiSaver and be an active contributor when they begin working.
Tax Benefits: KiwiSaver contributions are taxed at your child’s Prescribed Investor Rate (PIR), which is based on their income. The PIR could be 10.5%, 17.5% or 28%. If they have investment income or earn less than $48,000, even a PIR of 10.5% still offers a potentially lower rate than some other investment vehicles. Be sure to get them an IRD number from Inland Revenue.
Choosing the Right Fund: Selecting the appropriate KiwiSaver fund is crucial. For young children with a long investment horizon, a growth fund, which invests primarily in shares, is often the most suitable option. While growth funds carry higher risks (market fluctuations), they also offer the potential for higher returns over a long period. As your child gets older, closer to 18, you might consider switching to a more conservative fund, like a balanced fund, to protect the accumulated gains. It is important to remember that past performance is not indicative of future results, but it’s a good idea to compare the historical performance of different funds before making a decision.
A Practical Example: Imagine you start a KiwiSaver account for your newborn and contribute $50 per month. Assuming an average annual return of 8% in a growth fund, by the time they turn 18, their KiwiSaver balance could be around $22,879 (this is before tax deductions). This amount can then continue to grow from the age of 18 when they become a full paying member and can access the First Home Buyers benefits later on.
Investment Funds: Diversification is Key
Beyond KiwiSaver, investment funds offer another avenue for investing in your children’s future. These funds pool money from multiple investors to purchase a diversified portfolio of assets, such as shares, bonds, and property. This diversification helps to reduce risk compared to investing in individual stocks.
Types of Investment Funds:
- Managed Funds: These are actively managed by professional fund managers who make investment decisions based on market analysis and research. They typically charge higher fees.
- Index Funds (Passive Funds): These funds aim to replicate the performance of a specific market index, such as the NZX 50. They have lower fees as they require less active management.
- Exchange Traded Funds (ETFs): ETFs are similar to index funds but are traded on the stock exchange like individual shares. They offer flexibility and diversification at a low cost.
Selecting the Right Fund: When choosing an investment fund, consider your risk tolerance and investment timeframe. Equity funds (investing mostly in shares) offer higher growth potential but also come with higher volatility. Bond funds (investing in government and corporate bonds) are less risky but provide lower returns. Balanced funds offer a mix of both. Research different fund providers and compare their fees, historical performance, and investment strategies. Websites like Morningstar provide valuable information for comparing fund performance.
Opening a Fund in Trust: You can open an investment fund in trust for your child. This means you, as the trustee, manage the investment on their behalf until they reach a certain age (usually 18 or 21). You’ll need to establish a trust deed that outlines the terms of the trust, including who the beneficiaries are and how the funds will be managed. Consult with a lawyer to ensure the trust deed is properly drafted. You’ll also specify the trustee on the investment documentation.
Dollar-Cost Averaging: A smart strategy for investing in funds is dollar-cost averaging. This involves investing a fixed amount of money at regular intervals, regardless of the market price. For example, you could invest $100 per month into an investment fund. When the market is low, you’ll buy more units in the fund, and when the market is high, you’ll buy fewer units. This helps to smooth out the impact of market fluctuations and can lead to better long-term returns.
A Practical Example: Suppose you invest $200 per month into a diversified managed fund with an average annual return of 7%. Over 15 years, your investment could grow to approximately $62,817. This would provide your child with a significant boost towards their future goals.
Investing in Property: A Long-Term Strategy
Property investment has long been a popular way to build wealth in New Zealand. While it requires a significant initial investment, it can provide both capital appreciation and rental income. Investing in property for your child involves purchasing a property and holding it in trust for them. This can provide them with a valuable asset in the future or a source of income while they are studying or starting their career.
Setting up a Property Trust: You’ll need to establish a formal trust to hold the property on behalf of your child. Consult with a lawyer specializing in trust law to ensure the trust is properly structured. The trust deed should clearly outline the beneficiaries (your children), the trustees (you or another trusted individual), and the rules for managing the property.
Choosing the Right Property: Consider various factors when selecting a property to invest in, including location, potential rental yield, and future growth prospects. Look for properties in areas with good schools, access to amenities, and strong demand. Consider properties close to universities or polytechnics to secure tenants. A property in Auckland can cost an average of $1 million but the rental rates are good. While properties in other regions such as Christchurch may be closer to $700,000. Do your research.
Managing the Property: You’ll need to manage the property effectively to maximize its return. This includes finding tenants, collecting rent, and maintaining the property. You can either manage the property yourself or hire a property manager. Property managers typically charge a percentage of the rental income (around 7-10%) but can save you time and effort. Be sure to comply with all landlord obligations under New Zealand law.
Tax Implications: Property investment comes with various tax implications, including income tax on rental income, capital gains tax (if the property is sold within a certain timeframe), and land tax. Consult with a tax advisor to understand your tax obligations and how to minimize your tax liability. For example, expenses related to property management and maintenance are generally tax deductible. The bright-line test can impact the time frame in which a property can be sold without getting hit by capital gains tax.
Leveraging Mortgage Debt: Mortgage debt can be used to amplify returns in property investment. However, it also increases the risk. Ensure you have a solid financial plan and can comfortably service the mortgage even if interest rates rise or rental income decreases. Interest rates directly impact payments on mortgages. If rates get too high, repayments make it harder to cover the mortgage and other property related costs.
A Practical Example: You purchase a rental property for $600,000 with a 20% deposit ($120,000) and a mortgage of $480,000. The property generates $500 per week in rental income. After deducting expenses (mortgage interest, property management fees, rates, insurance, maintenance), you have a positive cash flow of $200 per week. Over time, the property value appreciates, providing your child with a valuable asset.
Sharesies and Hatch: Getting Started with Share Investing
Online investment platforms like Sharesies and Hatch have made share investing more accessible to average Kiwis. These platforms allow you to invest small amounts of money in companies listed on the New Zealand Stock Exchange (NZX) and international stock exchanges (like the NYSE and NASDAQ). This can be a cost-effective way to teach children about investing and build a diversified portfolio.
Key Features:
- Low Minimum Investments: Both platforms allow you to start investing with as little as $5.
- Fractional Shares: You can buy a fraction of a share, making it possible to invest in expensive companies like Apple or Google even with a small budget.
- Auto-Invest Feature: You can set up automatic investments at regular intervals, such as weekly or monthly.
- Educational Resources: Both platforms provide educational articles, videos, and tutorials to help beginners learn about investing.
Setting up an Account for Your Child: Technically, you can’t directly open an account for a minor on these platforms. However, you can invest on their behalf by creating an account in your name and designating the investments for your child’s future. It’s important to carefully document this arrangement for tax purposes and potential trust implications.
Sharesies also offer a special feature where you can send gift cards for shares. This is a great way to get your child involved with the world of investing and start their investment journey earlier.
Choosing Stocks and ETFs: Start with well-established companies in sectors you understand. Consider investing in ETFs that track broad market indexes like the S&P 500. This provides instant diversification and reduces risk. Encourage your child to research different companies and industries and make their own investment decisions (with your guidance). Remember, this is a great opportunity to teach them about financial literacy and responsible investing.
Fees and Costs: Be aware of the fees charged by these platforms. Sharesies charges transaction fees on buy and sell orders, while Hatch charges a percentage fee on each trade. Compare the fees of different platforms and choose the one that best suits your investment style and budget. Also, note that there may be currency conversion fees for trading in international markets.
A Practical Example: You open an account on Sharesies and start investing $20 per week in an ETF that tracks the NZX 50. Over 10 years, with an average annual return of 8%, your investment could grow to approximately $16,000. This provides your child with a valuable nest egg to help them achieve their financial goals.
Bonds: A Conservative Option
Investing in bonds can be a more conservative way to grow savings for your children. Bonds are essentially loans to governments or corporations, and they pay a fixed interest rate over a set period. They are generally considered less risky than shares, making them a suitable option for risk-averse investors, especially as your child gets closer to needing the funds.
Types of Bonds:
- Government Bonds: These are issued by the New Zealand government and are considered very safe investments.
- Corporate Bonds: These are issued by companies and offer higher yields than government bonds but also carry more risk.
- Inflation-Indexed Bonds: These bonds protect against inflation by adjusting the interest rate based on changes in the Consumer Price Index (CPI).
Investing in Bonds: You can invest in bonds directly through bond brokers or through bond funds. Bond funds are managed funds that invest in a portfolio of bonds, providing diversification and professional management. Consider using an accountant or other professional for advice on what bonds would be best.
Advantages and Disadvantages:
- Advantages: Lower risk than shares, predictable income stream, diversification benefit.
- Disadvantages: Lower potential returns than shares, risk of inflation eroding returns, interest rate risk (bond prices fall when interest rates rise).
A Practical Example: You invest $10,000 in a government bond with a fixed interest rate of 4% per annum. Over 10 years, you’ll receive $400 per year in interest income, and at the end of the term, you’ll get your initial investment back. While the return may not be as high as with shares, it provides a safe and stable way to grow your child’s savings.
Insurance Policies: Protecting Your Investment
Consider taking out insurance policies that benefit your children, such as life insurance. While not strictly an investment, life insurance can provide financial security for your children if something unexpected happens to you. A lump-sum payout can help cover their education expenses, living costs, and future financial needs. This is particularly important if you are the primary income earner for your family.
Types of Insurance Policies:
- Life Insurance: Pays out a lump sum to your beneficiaries upon your death.
- Trauma Insurance: Pays out a lump sum if you are diagnosed with a serious illness or injury, such as cancer, heart attack, or stroke.
- Income Protection Insurance: Provides a regular income if you are unable to work due to illness or injury.
Choosing the Right Policy: Assess your family’s financial needs and choose a policy that provides adequate coverage. Consider factors such as your age, health, income, and outstanding debts. Compare quotes from different insurance providers to find the best deal. A financial advisor can help you find the deal that best suits your family.
A Practical Example: You take out a life insurance policy with a sum insured of $500,000. If you pass away unexpectedly, your children will receive this amount, providing them with financial security and helping them achieve their future goals.
Regular Reviews and Adjustments
Investing for your children’s future is not a one-time task but an ongoing process. Regularly review your investments and make adjustments as needed. This includes:
- Annual Portfolio Review: Review your investment portfolio at least once a year to assess its performance and ensure it aligns with your goals and risk tolerance.
- Rebalancing: Rebalance your portfolio periodically to maintain your desired asset allocation. If your share investments have performed well, you may need to sell some shares and buy more bonds to maintain your target allocation.
- Adjusting for Life Changes: As your children grow and their needs change, adjust your investment strategy accordingly. For example, as they get closer to university age, you may want to shift to more conservative investments to protect their savings.
- Seeking Professional Advice: Don’t hesitate to seek professional financial advice to help you make informed investment decisions. A financial advisor can provide personalized guidance and help you navigate the complexities of the investment world.
Important Considerations
Before making any investment decisions, it’s essential to consider the following factors:
- Risk Tolerance: Understand your own and your children’s risk tolerance. Some people are comfortable with high-risk investments that offer the potential for high returns, while others prefer a more conservative approach.
- Investment Timeframe: Consider the timeframe for your investment goals. If your children are young, you have a longer timeframe and can afford to take on more risk. If they are closer to needing the funds, you may want to opt for more conservative investments.
- Fees and Costs: Be aware of the fees and costs associated with different investment options. These can include management fees, transaction fees, and tax implications.
- Diversification: Diversify your investments across different asset classes, industries, and geographic regions to reduce risk.
- Tax Implications: Understand the tax implications of your investments. This can include income tax on investment returns, capital gains tax on the sale of assets, and estate duty. Consult with a tax advisor to minimize your tax liability.
Financial Education for Your Children
Investing in your children’s financial education is just as important as investing in their financial future. Teach them about money management, saving, budgeting, and investing from a young age. Involve them in the investment process and explain the risks and rewards. This will equip them with the skills and knowledge they need to make informed financial decisions throughout their lives.
Tips for Teaching Children about Money:
- Give them an allowance: This allows them to learn about earning, saving, and spending money.
- Help them set financial goals: Encourage them to save for something they want to buy.
- Teach them about budgeting: Help them create a budget and track their spending.
- Discuss financial topics: Talk to them about the importance of saving, investing, and avoiding debt.
- Lead by example: Show them that you are responsible with your own finances.
FAQ Section
Q: Can I use my KiwiSaver to invest for my child?
A: No, you cannot directly use your existing KiwiSaver funds to invest for your child. KiwiSaver funds are locked in until you reach retirement age (currently 65), except for specific circumstances such as purchasing your first home or facing financial hardship.
Q: What happens to the investments when my child turns 18?
A: When your child turns 18, they gain control of their KiwiSaver account and any investment funds or savings held in trust for them. They can then decide how to manage these funds, whether to continue investing them, use them for education, or save them for a future goal such as purchasing their first home.
Q: Are there any government grants or subsidies available for investing in my child’s future?
A: While there aren’t specific government grants solely for investing in your child’s future, they will be eligible for government KiwiSaver contributions when they begin working, and may qualify for the First Home Grant to help purchase their first home.
Q: Is it better to save or invest for my child?
A: Investing generally offers the potential for higher returns than saving in a bank account. However, it also comes with more risk. For long-term goals such as education or a first home, investing is often the better option, as the power of compounding can significantly increase your returns over time. For shorter-term goals, such as a holiday or a small purchase, saving may be more appropriate due to the lower risk.
Q: How much money should I invest for my child?
A: The amount of money you should invest for your child depends on your financial situation, your investment goals, and your risk tolerance. Start by assessing your budget and determining how much you can realistically afford to invest each month. Even small amounts can make a big difference over time, thanks to the power of compounding. A financial advisor can help you create a personalized investment plan that meets your specific needs and goals.
References
- Inland Revenue, IRD numbers
- KiwiSaver Act 2006
- Financial Markets Authority (FMA)
- Sorted.org.nz – New Zealand’s free financial help
The future you want for your kids is within reach. Starting early, researching your options, and committing to a consistent investment strategy can make a world of difference. Don’t wait for the “perfect” moment. Start today, even if it’s with a small amount. Every dollar you invest now has the potential to grow into a significant sum in the future. Speak with a financial advisor to tailor a plan to your specific circumstances. Take control of your children’s financial future and give them the gift of a solid foundation for success.
