Clever investing in your child’s name
If you can’t save to save your life, you should probably blame your parents. Managing money is easy enough for children to understand, yet very few parents know how to teach basic investment principles because very few understand it themselves. A hand-to-mouth approach to money can become an intergenerational curse, which is why we propose you break it. Enter indexed unit trusts – easy enough for first-time investors and children to understand. DO IT FOR THE CHILDREN Adults can make third-party investments on behalf of a minor through platforms like etfSA.co.za and Satrix. By buying index tracking products like indexed unit trusts or ETFs, parents can squirrel away as little as R300 per month in their child’s name and use the opportunity to teach children how to invest.
“I like the idea of using an ETF to teach children about investments,” says financial adviser, wealth manager and author Warren Ingram. “By the time your child reaches high school you can start teaching them about the constituents of the investment. You can see the names of the underlying companies inside the ETFs. When you’re driving around, you can teach them that they own a bit of each company. It gives them a chance to understand that it’s not just pieces of paper but real business,” he says.
In addition to illustrating fundamentals of investment, investing with your child also helps to illustrate the more common investment traps adults so often fall into. Ingram says a drop in the stock market is the perfect opportunity to show your child how the investment is affected. You can teach them why it’s important to stay invested during a stock-market drop, why they don’t need to panic and how an investment can grow despite the setback. HOW MUCH SHOULD YOU INVEST? On both etfSA.co.za and Satrix, you can invest a minimum of R300 per month or make a minimum lump sum contribution of R1 000 per investment. Perhaps it’s worth encouraging your child to save by contributing one rand for each rand they save but the details are up to you. WHAT SHOULD YOU BUY? Ingram says equity is your best bet when investing on behalf of a minor because shares remain the best performing assets over a period. “You should only be going into pure equity ETFs, not balanced ETFs or commodities. Rather have a diversified portfolio than a specific view.” THE TAX IMPLICATIONS The good news is that you won’t be taxed on investing on behalf of a minor, providing the investment is in the name of the child and your contributions remain under R100 000 per year. A WORD OF CAUTION “The most obvious pitfall with this type of investment is that once the child turns 18, she has the right to access that investment. She is legally entitled to sign for it. You have no legal rights. Be prepared to educate your child in the 10 years leading up to her 18th birthday not to cash it straight away,” he says.
Fortunately, you can also start a retirement annuity (RA) on behalf of your child, which she’ll be able to access once she’s 55. Ingram says that the biggest benefit to investing in an RA on behalf of your child is all of the growth inside the RA is tax fee, but advises a combination of indexed unit trusts and RAs for the best of both worlds.