Investing for your children’s future – Part 2

In the last article I discussed three things that are important to do if you want to help your children out financially. As a reminder, they are spend less than you earn, be mortgage free and invest wisely.

This article is going to focus on how you can invest wisely. I will cover the different types of investments, your investment strategy and finally how to invest to give you the highest chance of success.

Types of investments

Broadly, there are four types of assets. These are business and property, which are classes as growth assets and bonds and cash which are conservative assets.

Businesses and property can include your own business or investment properties through to large corporations such as Apple, Amazon or Westfield. Generally, business and property provide high returns, albeit with more risks. Over the last 20 years, Australian property and listed businesses have provided average returns of up to 9%.

Bonds and cash are when you lend your money to others (governments or other corporations) and get interest in return. There are less risks associated with these, although the long-term returns are about 4% less than growth assets.

When making long-term investments, having a higher proportion of growth assets is likely to give you better returns. If you are investing for 15 or 20 years, this could have a big impact on the value of the investment at the end.

Investment strategy

With investing, there are three ways to do it.

1. The first is to do it yourself and run your own business. This can be beneficial and often encouraged. However, this should not be your only investment as you don’t want to put all your eggs in the one basket.
2. The second strategy, is called active investment. With this strategy, the investor or fund manager actively chooses what they will invest in. This includes buying shares in individual companies or owning investment properties. This has its place, especially investment properties, however thee is the risk that you buy shares in the wrong company or the suburb where you own the investment property doesn’t provide great returns.
3. The third investment strategy is called passive investment. Instead of trying to pick which company will perform the best, the fund manager simply invests in them all. For example, the fund manager may invest in all 300 companies in the ASX300. This can be done through Exchange Traded Funds or index funds. I recommend passive investments because they have low fees and they outperform active fund managers 75% of the time.

How to invest

There are four ways to invest.

1. The first is through Super. This is the most tax effective way of saving. However, the downside is that you can’t get the funds out until you reach a condition of release, which for most of us is not until you turn 60. If this coincides with when you are planning on helping your children, this may be the best place for you to invest. If you need to access the funds before then, you may want to read on.
2. The second way is by holding the investments in a family trust or company. There can be tax benefits, including being able to direct income to a beneficiary that has the lowest income, but you need to weigh up whether the benefits will outweigh the additional costs.
3. The third way is through Investment Bonds. Investment Bonds are a way of investing that has the tax paid within the investment rather than by you personally. To get the full tax benefits you only need to keep the money invested for ten years. The downside is that the investment fees are significantly higher and you don’t get the capital gains tax concessions as you would if you held it personally. These higher fees and the lack of capital gains tax concessions do not make investment bonds worthwhile. That said, Investment Bonds can provide other benefits such as for estate planning purposes.
4. The final way is to invest in your own name (or your spouse if their income is lower) and then transfer to your children whenever you are ready. You will more than likely pay higher income tax and you will have capital gains tax to pay when you transfer them. However, you will save by having lower fees. If you need the funds before you turn 60 and the amount you are investing does not make having a trust worthwhile, this is likely to be your best choice.

So putting these three things together, the best way to invest for your children’s future is a passive investment with a high percentage of growth assets that is invested through either your super, a family trust or your own name.

If you would like to discuss which of these options are best for you and your children, book a chat via the link below or contact us on 0417 034 252.