I mostly work with people that either have young children or are planning on having children shortly. Quite rightly, one of the main goals they have is to be able to save for their children’s future.
For different people their motivation will vary, but it generally includes things such as wanting to send them to a private high school; helping them go to university; giving them financial support to set up a business; or helping them out with a deposit for a house.
This article will be the first of two where I discuss the things to do to achieve your goal of being able to help your children financially. This article will cover the three basic things I believe are important, while the next one will cover the best way to invest.
Spend less than you earn
While this sounds simple enough, many people spend nearly everything they earn. If you routinely spend nearly everything you earn (or in some cases, more than you earn), you will never be in a position to help your children financially. Assuming you earn a good income, one of the easiest ways to stop spending everything you earn is to put money aside for your future goals before you see it.
Be mortgage free
Being mortgage free by the time your children need more support will allow you to either help them financially, or be able to reduce the amount of time you work so you have the time to invest in them.
The reasons why you should get rid of your mortgage as soon as possible are the effective returns are tax free and guaranteed. In addition, you get to model great financial behaviour to your children. Besides having them turn into loving and caring adults, this is probably the next most important thing you can do for them.
The argument against doing this is that long term returns for a high growth investment (such as property or shares) should provide better returns than paying off your mortgage. While this is mostly true, it is not guaranteed.
If you are investing for your children’s future, most investments will have a timeframe of between 10 and 20 years. Over time, small differences in annual returns after all fees and taxes are likely to make a big difference. To demonstrate, assume you invested $5,000 every year for 10 years for your children’s education. If the investment had net returns of 6% the final investment would be worth $70,000. If those same funds were invested in an investment with 8% net returns, your final investment would be worth $78,000.
Investment returns can’t be guaranteed, but the best way to put you in the top 25% of all investors is to invest in a portfolio that is made up of low fee, globally diversified investments. The best way to get this is to have passive investments such as index funds and exchange traded funds.
I will leave the analysis for how you should invest to the next article. In this, I will discuss whether you should invest personally, through investment bonds or through your super.