Future gazing

Setting your kids up with a firm financial foundation is a priority for many parents. But it can be hard to know where to start and even what your options are.

We spoke with our wealth engagement manager, Josh to get his expert opinion on the topic, given he’s juggling young kids and a mortgage.

Like many parents he’s still figuring out things like how to balance paying for his children’s education and helping them get a start in life down the track.

Asked about the right age to start planning for your children’s financial future, he says everyone has different priorities and goals. “It’s never too early to get started, but at the same time, it's never too late to start. My oldest is five. When he was born I wanted to set something up for him financially straight away. But we weren't really in a financial position to do that right then. Now, we are. So things change over time.”

Saving fundamentals

At a very basic level, savings accounts have often been used by parents to get kids started on their savings journey. They are still a good concept to teach children about getting into good savings habits and for financial literacy. But it’s important to remember there are lots of options to explore to help your kids understand how to save for their future.

“You don’t have to put money into a savings account. You can also consider managed funds or shares. It’s about finding options to suit you and your circumstances,” Josh says.

Many parents open a savings account with a certain amount, say $1,000, and then add amounts on a regular basis, like $50 or $100 a month. It all adds up over time, especially when you take into account compound interest. This is a mechanism that helps to build returns because you earn interest on the interest the account generates over time.

But it’s important to remember the official cash rate, which is an interest rate set by the Reserve Bank of Australia that helps banks work out how much interest they pay on things like savings accounts, is at all-time lows. This affects the return savings accounts generate because the interest rate they earn is in part determined by the cash rate. So, because interest rates are so low, the money you earn in a savings account is now very low. So, while everyone’s circumstances are different, it may be worth exploring other investment options.

Lots of options

Managed funds are a one popular investment product families could consider to help their kids start investing. There are many different types of managed funds. Some generate the same return as the share market. Others are exposed to other asset classes such as commodities, property and much more. But most pool their unitholders’ money and invest the proceeds according to the funds’ rules.

You can also invest money in shares on the stock exchange. This allows you to buy and sell an interest in some of the most popular household name companies in Australia and many other businesses as well.

“Each of these options has its own risks and rewards and it pays to do research and seek professional advice before choosing your path,” says Josh.

This is just a very basic introduction to some of the options available to parents that want to set their kids up with a firm financial foundation. It’s equally important to teach them investing basics so they can contribute to their future as their wealth grows.

Everyone’s needs are different. So make sure you take your family’s position into account before making any decisions about how to spend your money.

For more useful tips on planning for your family's future, listen to our Make it Count Podcast with Too Peas.