MONEY WITH KIDS
I often have people come to see me who have a goal of saving or investing money for their kids. The reasons vary… sometimes it’s with a view to paying for their education, in other cases, it’s with a goal of helping kids buy a house in the future. Or it may just be to have some money to give them a leg up when they reach adulthood.
I’ll usually put a different spin on things…
In my opinion, when it comes to money, the best gift you can give your kids is teaching them to be responsible with money and not being a burden on them later in life.
Pay off the mortgage instead of saving for the kids. A lot of parents have a genuine desire to help their kids by putting money away in savings accounts for them later in life. There are a few problems with this strategy…
The money doesn’t grow. When you combine the impacts of inflation, tax and low interest rates, chances are that any money being saved is actually going backwards.
For example, if you can get 3% on your savings, lose 1% in tax and prices are rising by 2.5% per annum, the net result is a real return of MINUS 0.5%. That’s not doing a whole lot to help the kids in the future!
It would actually be much better to pay that money off the mortgage. If you’re paying interest on the mortgage at 4%, then any money paid off the mortgage is effectively getting a return of 4% and that return is tax-free!
This then opens other avenues to wealth… when you have enough equity in your home, you can look to borrow some money to invest. Done sensibly, this is an easy way to accelerate wealth creation by tax-effectively investing in things that grow. A savings account will never grow, it will only earn a little interest. Shares and property grow in the long term and if you combine them with low fees, diversification and time, you’re on a winning ride.
There are many other things we could go into, but in the time that I have your attention, I want to focus on one other key plank when it comes to sensible strategies for people who care about their kids… protection.
Life can tick along pretty nicely when you and your family have a regular income. However, if that regular income stopped or was severely reduced because a bread winner died or could not work because they were sick or injured, then not only will the family be forced to go through a tough emotional time, but they will potentially be financially ruined.
Things like life insurance and income protection are no-brainers for people who care about their partner and kids. As you build a wealth pyramid for you and your family, these types of insurances should form the foundation so that if disaster strikes, the whole pyramid doesn’t come tumbling down.
In saying that, you can most definitely have too much insurance and there’s reason to be suspicious of any business who is incentivised to sell you more insurance because they get paid a commission (not to mention that if commissions are involved you’ll be paying 30% more in premiums each and every year!).
Wealth creation and wealth protection go hand-in-hand. If you need a help with either, give me a call.
If you’d like to find out more about how INDEPENDENT financial advice could help you manage cash flow, pay off the mortgage faster, get the most out of super and invest wisely, then get in touch on 0411 484 464 or head to wealthtrain.com.au.
Daniel McGregor is the man behind Wealth Train and is a member of the Independent Financial Advisers Association of Australia. This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided are general advice only.
Daniel McGregor and Wealth Train are authorised representatives of Independent Financial Advisers Australia AFSL 464629