Ask the experts
They’re only four years old or younger ... but it’s never too early to start building wealth for the future
NAME: John Prentice STATUS: Retired grandfather of three young boys.
QUESTIONS: I would like to put aside $1000 a year for each of my three young grandchildren, who are aged from 18 months to four years. What is the best way to invest? Should I set up one fund for all three or set up three separate funds?
ANSWERS: Hold your grandchildren’s investments in your name, perhaps with an account designation. While one account may save you money, three separate accounts will give your kids a greater sense of ownership and they may like to contribute to them when they are older. As an investment, our experts’ suggestions include low-cost, diversified exchange traded funds.
What is the best way to build up savings and investments for grandchildren? Increasingly grandparents such as John Prentice want to show their love with a financial gift that will give his three grandchildren, Beau (4), Lachlan (2) and Harry (18 months), a meaningful opportunity when they are young adults. It might pay for university fees, or go towards a deposit for a home, car, overseas trip or education exchange. It would depend on the child and their needs. “Instead of buying toys, which they have plenty of, this will build up to pay for something more important,” says John.
He plans to deposit $1000 for each child and then put in around $1000 each year instead of Christmas and birthday presents. John also wants his grandchildren to learn the important financial lesson of com- pounding as the money grows over time. “I am a great fan of compound interest.” He expects they will take an interest in their accounts as they grow older. “It will be a learning curve. I hope that later on in their life the kids will contribute to the fund.”
John says that when he was young he never saved a penny until he drew up a budget. “Once I started saving I kept saving.” Now he is a self-funded retiree, drawing down a tax-free account-based pension from his superannuation fund, Cbus.
With John’s own kids, he realised that if he gave them their own money to spend, rather than relying on him, they would be much more careful with it. “I used to take my daughter to the Royal Easter Show and it cost me a fortune buying lots of rides and everything. A friend of mine suggested that I give her $50 to spend and tell her she could buy what she wanted and keep the change. She had two rides and kept the rest. They surprise you sometimes.”
John wants to know the best savings and investment options for his grandkids. What are the tax implications of different plans? “I assume I am better off having one fund, rather than setting up three,” he says.