As an adviser working with many couples and young families this is one of my most frequently raised topics.
My first piece of advice is — before you can look after the next generation, you must first look after yourselves. This means having a stable cash flow system, protecting against the unforeseen as well as investing for your own futures. However, once you’re in a steady financial operating rhythm, making strategic decisions when it comes to setting up your children can pay off.
Articulating what you’re trying to achieve for your children, and how far away that is, will impact the best strategy for you. One of the fundamentals of investing is that the longer an investment timeframe is, the more risk we can take on.
In the next couple of years (short-term)
If your goal is less than three years away, the main goal needs to avoid risk. You haven’t got sufficient time to ride out any changes in the value of our money or investment.
What does this mean? Cash savings. A high-interest (low-fee) savings account, or if you’ve got a mortgage, directly into your offset account.
Cash isn’t sexy, it’s slow, and feels like we’re not doing much. But, that’s the aim for short term goals; accept a low (or no) return, in exchange for lower risk.
Finally, set-up an automatic savings plan that happens before you start spending, so it’s not an after-thought.
In three to 10 years (medium-term)
Beyond three years, we can and should be considering investment strategies. There is time to account for any market changes and volatility. The benefit of this is that long term returns will be higher than what your savings account will provide.
There are well-diversified and low-cost investments available – such as exchange-traded funds (ETFs). The investment options you choose (such as balanced, growth, high growth) must align with your timeframe. Shorter timeframe equals less risk. With a longer timeframe, you might be open to more growth assets.
Investment accounts allow you to build up over time with regular contributions. You can “save” for this goal, using investments, the same way you would contribute to a bank account.
Ten years plus (long term)
If you are thinking long term, and your kids are young – an insurance bond is potentially a great solution. Insurance bonds allow you to invest in a tax-effective way (seek advise from CapitalQ about your tax requirements).
You can invest in the same or similar assets as above but underneath exists an investment structure that will save you tax. This option will also work well for most starting balances (some products have minimum initial contributions of $1,000) and you can contribute your savings month by month until you reach the goal.
Alternatively, if you are thinking long term, a property may be an option. Property might work if flexibility is less important, or perhaps your goal directly links to the property itself, like giving your kids a leg-up on entering the market when they are older.
No matter the goal
Whatever your goal is, you need to be clear and intentional on how you’re going to get there. Hope and love is not a viable financial strategy.
The decisions we make now, compounded over time, make a world of difference. Start early and start with what you have, and you will create great opportunities for your children in the future.