You always want the best future for your child no matter how much money you earn. With the growing cost of college education, wedding budgets, and well, bringing up a child, it’s a smart idea to do some financial planning.
This post is suitable for parents of all age; let it be someone with a toddler or even if your child is about to graduate from college. We’re going to discuss:
· Different investment options for your children
· Best accounts for investing
· Mistakes you would want to avoid as parents.
Let’s get started.
Investing in college education of your junior.
Setting your child for a bright future starts by giving them a good education. But, let’s face it; college is expensive. The past couple of years have witnessed a sharp rise in college tuition.
The average cost of college education in the US stands at $9,687 for in-state students at public colleges, $21,184 for out-of-state students at public colleges, and $35,085 for private colleges.
In the UK, fees for undergraduate degrees for home students are close to £9,250 per year and between £10,000 and £26,000 for international students.
With these figures in mind, it makes complete sense to start saving for your child’s college education.
In the US, a qualified tuition plan, 529 plan, is the right vehicle to save money for qualified educational expenses. A 529 plan is a tax-advantaged plan with no income limits, which means high-income earners can contribute just as much as regular contributors. There are no set contribution limits for 529 plans.
Another option is to save money in an Education Savings Account or ESA. You can contribute up to $2,000 per year, but there is a maximum income limit for ESA contributions (couples with joint income below $220,000 or individual filers with income below $110,000).
There are no designated tax-free accounts for college education in the UK, but a Junior ISA will just be fine for most parents. Parents or legal guardians can set up Junior ISAs for their children. The annual contribution limit stands at £9,000 (2020–21), allowing parents to stock up funds quickly.
The child gets control of the junior ISA at the age of 18.
It is important to note that Child Trust Funds (CTFs) have been replaced by Junior ISAs since 2011. The government allows conversion of a CTF into a Junior ISA.
Helping your children through their retirement!
Retirement crisis has become a global phenomenon with most people across the developed as well as developing world worrying about funding their retirement.
A recent study reveals that over 75% of Americans are worried that they will run out of money during retirement. Similarly, 58% of Brits, aged 45–60 years, are not sure whether they’ll be able to maintain their standard of living during retirement.
So it isn’t a surprise if you want to support your child during his or her retirement. We understand that it may appear to be a long-shot but allow us to explain.
The UK government allows parents to establish SIPP for their children with an annual contribution limit of up to £3,600. Since junior’s retirement is decades away, you invested in a low-cost index fund that tracks the FTSE All Share Index.
Let’s assume that you make all 18 contributions for your child and the money stays untouched until retirement. The average annual returns of the FTSE All Share Index for the past 30 years is 9.9%.
Your child will have £171,122 at 18 years of age.
And if these funds are then parked into the same index fund until retirement (55 years) with a conservative rate of return of 6%, your child will have close to £1.48 million at retirement.
Balance Breakdown II
Not only will your child remember you for your generosity, but you’ll become an inspiration for parents across the town, if not city or nation.
In the US, you need to wait a little longer to open a Roth IRA for your child, although there is a catch. You can open a Roth IRA for your child only when he or she has a job, so always motivate them to start taking part-time jobs at a young age.
You can choose between a traditional IRA or Roth IRA. We recommend Roth IRA because of its tax-free structure.
You can also choose other assets, including bonds or gilts, to diversify the retirement fund of your child. The trick is to start as early as possible.
Investing money for daily expenses of your kids.
Now that we have covered the two most important financial aspects of your child’s future, let’s talk about providing financial support for daily expenses.
We found several savings options when it comes to providing consistent financial support to children.
Parents in the UK can purchase NS&I Children’s Bonds for children under the age of 16 years. The good part about NS&I Children’s Bonds is that anyone can purchase them, including grandparents or guardians, for your children. These bonds offer guaranteed returns on your investments.
However, there are penalties for early cashing out, so make sure to satisfy the due maturity period.
The US offers similar saving instruments in the form of UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act). You can contribute funds under these schemes as the custodian. Your children will get access to these funds once they reach the age of 18 to 21 years.
Also, since these funds will be taxed at your children’s tax bracket, they’ll end up pocketing more of this money. There are no limitations on how your children can use these funds, although we recommend you to train your child to manage finances responsibly.
Now that we have covered various investment vehicles for saving money for your children, it’s time to focus on some popular investment options.
Historically, stock markets have offered groundbreaking returns in comparison to other asset classes. For parents planning to save for their child’s future, dedicating a portion of your portfolio towards stock markets could repay quite well.
The fact that you have a long investment horizon before your child accesses these funds makes stocks a good investment choice. Parents with limited understanding of the stock markets will be better off seeking expert help in stock investments.
ETFs or exchange-traded funds are ideal for your junior’s savings portfolio. ETFs carry a basket of different stocks, which makes them suitable for long-term investment periods. Not only will you get ample diversification, but ETFs also come with undeniably low expense ratios.
When choosing ETFs, we recommend you to focus on broad markets and avoid sectoral or thematic offerings.
3. Mutual Funds
Much like ETFs, mutual funds offer an excellent investment opportunity for investors seeking exposure to the stock markets. Considering a longer investment period, you can maintain an aggressive investment strategy during the early years and gradually move towards safer assets.
In the case of mutual funds, you can choose between actively-managed funds or invest in index funds. The former comes with a higher expense ratio but offers consistent monitoring of the portfolio. This could be handy during bear markets.
Index funds, on the other hand, charge only a fraction of what actively-managed funds cost. Over the long-term, index funds offer competitive returns. However, if you are caught in a bear market at the time of maturity, your portfolio could take a significant hit.
Bonds are among the safest investment options available in the market. You can purchase government bonds (Treasury bonds or Gilds) or highly-rated corporate bonds for consistent returns on your investment.
However, it is critical to keep an eye on the ongoing yield of bonds. You may want to add inflation-protected bonds to your investment portfolio.
5. Term deposits or CDs
Terms deposits and CDs offer consistent income by locking your capital for a fixed period. Your money grows at a pre-determined rate with the benefits of compounding the long-run. These fixed-income instruments provide stability and diversity to your child’s investment portfolio.
· Do not overpay for stocks in 529 plan or Junior ISA. Always take into account the impact of management fees on net returns. Also, make sure to track the performance of your investment portfolio.
· Do not invest in a single asset class. You should aim to diversify this portfolio by adding different assets. Not only it provides healthy growth, but your portfolio is ready for any adverse movements in any one of the asset classes.
· Do not ignore stocks. When investing for the long-term, stock markets can give outstanding results, so dedicate a portion of your child’s portfolio to stock investments.
Investing for the future of your child requires a decent understanding of investments, taxation, and financial planning. Do not hesitate to seek professional help if required. The trick is to start investing as early as possible and stay invested for longer durations.
Astro Finance is an investment advisory firm that provides managed investment accounts for your kids, such as Kids ESA and Custodial accounts. Reach out to our customer support team for more information on how you can start building wealth for your kids today, visit Astro Finance to learn more.