Saving for the kids

Save for the kids

From time to time, parents ask me for advice on the best vehicle to accumulate savings for the children. The intention of this blog is to give you a summary of your options and to let you know which option I think is the best.

Savings, gifts, inheritance and the like

Sometimes parents would like to save a regular amount of money for their child’s future benefit. These monies might be used to fund part or all of education costs, a deposit to buy a house, to buy a car and so on. Also, some children might receive monies via inheritance or gifts and their parents want to invest this wisely on the child’s behalf.

And the options are…

There are a variety of options that you could consider and I discuss the main ones below:


Of course, you can deposit regular contributions into a high yielding savings account. Whilst this option is very simple and low risk, the investment returns can be quite low – particularly at the moment. For example, RaboDirect typically have very competitive products and its PremiumSaver product will currently pay you 2.45% p.a.


Instead of picking a couple of shares to invest your child’s savings, you are much better off to invest the monies in a broad index – because this provides substantial diversification. There are two ways to access low-cost index funds; via retail managed funds or an Exchange Traded Fund (ETF). Retail managed funds (such as this one from Vanguard) typically require a minimum investment of $5,000. My advice is to stick to low-cost, retail index funds. An ETF is a managed fund that is listed on the Australian Stock Exchange. To invest in an ETF, you would need to establish an online trading account (such as CommSec) and buy shares in your chosen ETF/s. This allows you to begin investing with a smaller amount upfront. Both options are relatively similar in cost (the retail fund might be slightly more expensive) – just choose the one which you think is most appropriate for your situation. In terms of retail managed funds, I would stick to the Vanguard funds mentioned above. In respect to ETF’s, here are a couple of recommendations which invest in the Australian market only: QOZ, IOZ and STW. If you would like international exposure and/or you’re investing a significant amount of money (say more than $50,000), then it would be wise to obtain some specific advice in respect to how to invest.

Update May 2018: Vanguard recently released some new diversified, low-cost EFT products:Vanguard Diversified Balanced Index ETF (VDBA) and Vanguard Diversified Growth Index ETF (VDGR)

Your home loan

Instead of contributing monies towards a separate investment, one option you could consider is “parking” those monies in your home loan to reduce your interest costs. Today, this would give you a risk-free return equal to your home loan interest rate (circa 5% per annum). Whilst this isn’t a huge return at the moment, when home loan interest rates rise in the future, your risk-free return becomes significant. You can then redraw these extra repayments in the future when required.

Education funds

I am not a big fan of these products as I discussed in this blog a few years ago (see under subheading “How do Education Savings products stack up?”).

Looking after yourself first ultimately looks after you kids

Pre-flight safety demonstrations always advise you to affix your oxygen mask before that of your child’s. Doing so ensures you will be able to assist your child. The same is true when it comes to financial planning. The best thing you can do to help your child in the future is to look after yourselves first. That is, if you manage cash flow and invest well then you build a significantly strong financial position. As such, you’ll have many options and resources at your disposal to help your children. Therefore, I always advise clients to ensure their own financial strategy is well advanced before they consider directing cash flow towards helping their children. Now, I appreciate that sometimes people have different goals – so if it’s important to you to save for your children’s future then hopefully some of the tips in this blog help.

Taxation consequences

The owner of the investment will obviously be taxed on its earnings. Therefore, think carefully about how you will own your child’s investments. There are two reasonable options:

  1. You can open an account in trust (i.e. on behalf of your child). In this regard, your child can earn up to $416 per annum tax-free. Any earnings over this amount will essentially attract the highest marginal tax rate.
  2. You can put the accounts in your name (or your spouses if they have a lower taxable income than you). Any income and capital gains will be taxed at your marginal tax rate.

Further advice?

The above blog gives you a broad overview of your options. Of course, if you would like to discuss this further, please do not hesitate to reach out to us.