Investing on behalf of your kids can ensure their future and their happiness

It is a good idea to invest a bit on behalf of your children each month, because it helps to teach them about financial freedom from a young age to ensure they can spend their precious time doing what they like and need, rather than doing things to earn money.

“We’ve all heard the phrase: it is not about timing the market, but time in the market. One of the most important lessons parents can teach their children is the value of money – how to really understand the dynamics around investing and how to make money work for them,” Robyn Laubscher, advice and product specialist at PSG Wealth, says.

This is no easy task, as we live in a society where everything seems to have a price and is instant and disposable and where money is not necessarily valued, she says. She suggests that you choose one of two popular investment vehicles to save for your children’s future: a tax-free savings accounts (TFSAs) or retirement annuities (RAs).

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Tax-free savings accounts (TFSAs)

Laubscher says you can contribute to a TFSA monthly and also make ad hoc payments from time to time. “The flexibility this offers means that this product is often used as a savings vehicle to contribute towards a child’s tertiary education.”

However, she says, you need to be aware that, although any person, including minor children, can invest in this product and even have more than one TFSA, the annual limit that an individual can contribute per tax year is R36 000, while there is also a lifetime contribution limit of R500 000 per person.

“However, once you reach the maximum contributions allowed, you can continue to contribute to another savings vehicle, such as a voluntary investment.”

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Retirement annuities (RAs)

She says the power of compound interest and growth helps to ensure that you can meaningfully contribute to a minor child’s financial freedom when they reach retirement age.

For example, as a parent, you could contribute to a retirement annuity in their name.

“There is no tax deduction, but one of the benefits of investing in an RA is that it encourages parents (and their children) to maintain savings discipline. Once your child starts to earn an income and can take over the contributions, the normal retirement fund rules will apply in terms of the deductibility of contributions and access to retirement funds.”

Opening an investment in a child’s name will help to educate them about retirement planning and Laubscher says there is no better way of doing this than them watching their own investment grow.

“When they are a little older, you can encourage them to contribute some of their pocket money or birthday money to their investment to not only teach your child about financial planning, but also giving them a head start.”

For example: if you invest R500 per month, escalating at 6% per year for 18 years (assuming a growth rate of 10%), the balance will be R427 819 after 18 years. If you stop contributing when your child turns 18 and leave those funds to grow, those funds should be equivalent to R14 547 515 when they reach the age of 55.

“However, if your child decided to continue contributing to this RA when they reach the age of 18 (assuming a contribution amount of R1 500, escalating at 6% per year and a growth rate of 10% per year), the value will be around R26 581 386 when they reach 55.

“In today’s terms, that is just over R3 000 000. This is the benefit of using the products available in the best way possible.”

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The importance of a savings strategy

Laubscher says having a savings strategy in place assists with decision-making. “When it comes to family and friends wanting to spoil the children with presents for birthdays and Christmas, why not suggest that a small portion of what they were going to spend be invested… the numbers will tell the rest of the story.”

She says one thing is for certain, you will never regret that you planned for your retirement and that you have the privilege of retiring comfortably and your children will be incredibly grateful.

“Hopefully, they will do the same with their children and slowly but surely, we will change our nation into one with a better savings culture.”