Investing for Kids

Looking to start investing for your kids but unsure where to begin? We’ve got you covered!

We all want to give our children the best possible start in life. While teaching them about hard work and financial responsibility is important, setting up an investment plan early can provide them with a significant financial advantage in the future. 

Investing for your child doesn’t have to be complicated or require large sums of money. With the right approach, even small contributions can grow into a substantial nest egg over time. Whether you’re looking to fund their education, help them buy their first home, or simply set them up for long-term financial security, starting early can make all the difference. 

1. Budget

Before diving into investments, it’s essential to assess what fits within your family’s overall financial plan. Investing for your child should complement your existing budget, not strain it. Start by considering: 

• Initial Investment: How much can you comfortably set aside upfront without impacting your financial stability? 
• Ongoing Contributions: What amount can you consistently contribute over time? Even small, regular contributions can accumulate significantly with the power of compound growth. 

Remember, investing is a long-term journey! Don’t be discouraged if you can’t contribute a large sum right away — every little bit counts. The key is consistency, as steady contributions over time can lead to substantial growth in the future. 

2. Avoiding Analysis Paralysis! Choosing Your Investment Strategy

Your investment strategy comes down to two core factors:

• How much can you invest? Your budget will determine whether you opt for lump-sum investing, regular contributions, or a combination of both.
• What is your timeframe? Investing for children is typically a long-term commitment, allowing you to take advantage of compounding growth over time. 

3. How a Minor’s Investment Account Works

Setting up an investment account for your child allows you to manage their funds until they’re old enough to take over. Here’s what you need to know:

• Parental Custodianship: You oversee the account and make investment decisions until your child turns 18.
• Ownership Transfer: Once they reach adulthood, the investments are legally transferred into their name, giving them full control.
• Investment Options: These accounts can hold various assets, including shares, managed funds, or ETFs, based on your financial goals and risk tolerance.

4. Tax Considerations

Even kids aren’t off the hook when it comes to taxes! Investment income is still considered taxable, so it’s essential to understand the implications when investing on your child’s behalf.

A financial professional can help you navigate the best setup for your family, particularly when it comes to:

• Ongoing taxes on dividends or investment returns.
• Capital Gains Tax (CGT) when selling investments for a profit.

If your child’s account doesn’t have a Tax File Number (TFN), unfranked dividend income will be taxed at a hefty 47% rate — a serious hit to their returns. Plus, if they earn more than $416 per year from investments, you (as their parent or guardian) will need to lodge a tax return on their behalf.

Knowing these rules upfront can help you plan wisely and avoid any unwelcome surprises from the ATO!

5. Keeping it Simple

One of the most straightforward ways to invest for your child is through a low-cost managed fund with exposure to the share market. Here’s why: 

• Time is on their side: Since children won’t need access to their investments for many years, they can benefit from long-term market growth. 

• Long-term flexibility: Market fluctuations are inevitable, but history has shown that the share market tends to deliver strong returns over time.

• Less hands-on management: A managed fund allows professionals to handle investment decisions, making it an easy, passive option for busy parents. 

Managed funds pool money from multiple investors, to create a diversified portfolio, inclusive of stocks, bonds, or other assets. These funds provide the benefit of professional management and broad market exposure, potentially yielding higher long-term returns than traditional cash savings. 

Final Thoughts