I'm after some ozbargain advice.
My two kids (eight and three) inherited $28K each. We want to let the money 'work' until they're eighteen, and I guess grow at a rate more than inflation…
I guess my options are:
Longterm savings account (interest Raes are low though)
Managed funds (susceptible to economic downturns (1998, 2008, ??)
???? Profit
Since I think my kids are alright, I'd like to do the right thing by them.
Any ideas are appreciated.
Thanks :)
Thanks for the reply. I know nothing about managed funds. We throw all of our left over pay into the mortgage offset account.
The amount is significant, but I feel like if we see a financial planner it will eat into the amount and to be honest, levels of trust in them are at an all time low after the royal commission.
Do you suggest any managed funds in particular?
Has choice magazine done a review?
Don't worry I'm not going to jump into the first suggestion someone makes :)
I did a bit of research on it a while ago. Vanguard was one I liked.
Actually investment bonds might be a better idea, depending on your situation. This questions comes up on reddit and I had saved it.
https://www.reddit.com/r/AusFinance/comments/6uh066/children…
The biggest thing for me was trying to find a fund where it could legally be my kids account because the kids will pay the tax on earnings not me, which means they probably wont pay any tax because they don't have any other income, but I would have to pay tax as I do have an income; also because if I had a bit of money that wasn't mine it might have other unforeseen consequences like if I was to really fall on hard times and need government benefits like pension then I might not get it, I mean it's unlikely I will ever be eligible for government benefits but you never know.
Ah makes sense. I was thinking the same thing re income. our combined income means we would be taxed at a pretty high rate too.
Thanks again for the info I really appreciate it.
@Bellpop: I'm pretty sure that kids are taxed at the highest tax rate for unearned income above a certain amount, which I think was just a few hundred dollars.
I think the general idea was to discourage people from investing in their kids' names to avoid tax.
@eyeballz2770: It's bloody hard to find, but I got there in the end…
Child's tax-free threshold is $416, and the rate above that is high and doesn't work in the usual way.
https://www.ato.gov.au/individuals/investing/in-detail/child…
It would be worth looking into LICs with DSSP (see, e.g. https://www.aussiestockforums.com/threads/dssp-dividend-subs… )
There's 2 types of managed funds;
* Active - where you give your money to a fund manager and he will diversify/split the money into different types of investments that he/she believes will grow at a strong rate. Normally this type of investment should beat inflation however you're putting your trust into a person to ensure that money will grow, which is not always the case.
* Passive - as seano2101 mentioned below (Vanguard) is similar to a stock except your money is split proportionally (maybe depending on market share) into different public companies to mimic an index. So if you want to invest in an airline passive managed fund, some money goes into Qantas, some into tiger air, some into virgin etc. You might want to invest in a managed fund that mimics the ASX200 as the Australian stock market is predicted to grow every year meaning you will most likely get a return if a recession or depression does not hit.
Bonds/debentures are also a worthwhile investment. Government bonds are quite safe and normally guarantee a good return. Essentially, you're lending the government money and they will pay you interest. The rates are higher than term deposits. Have a look here if you're interested and the list of government bonds. Since your kids are so young, this might be a good option as your money is locked away for a good 10 years and some eTBs provide good annual return (4.5-5.75% p.a).
Thanks for the detailed response. I appreciate it.
Seems like the returns from this would (in most years) be better than putting the funds into our mortgage mortgage… but leaves us vulnerable to an economic downturn… but then I guess everyone is exposed…
Thanks for the ideas :)
@Bellpop: No problem!
IMO you should pay off higher interest loans before you start investing your own money. A 6% p.a interest on a home loan (which is usually hundreds of thousands of dollars) will hurt more than a 4-5% p.a return from an investment (in the mid 50-60 thousand dollars).
There's two thoughts that are going through my head right now in regards to your situation;
* Objectively speaking, home loan interest rates are quite low at the moment so this would be the best opportunity to pay off any loan. It's money for your kids however they're living rent free at the moment, it's a home for the whole family and you already pay for whatever fees are associated with your kids from your salary/wage. Also, you will save a lot on interest payments.
* Morally speaking, the money is not intended for your use. As a smart investor, you have looked into ways to invest the money to maximise return so when the time is right, you can rightfully pass on the inheritance money to your kids so they will be financially better off in the future.
Up to you on what you do in the end. I'm going to be a bit influential and leave you with your own words:
Since I think my kids are alright, I'd like to do the right thing by them.
depending on how much of a mortgage you have left, id probably be putting it straight into a fund. interest on your mortgage is like what, 5%? the offset earnings would probably be less than the fund over time.
if you put it in the offset, once its paid off id work out something to increase the inheritance. this is a good idea if you can budget well overall and pay it off very quickly, then you can worry about the inheritance money after
Indexed funds are like managed funds, but don't have someone speculatively fiddling with them, the fund just buys stocks from a certain segment. This means that they follow the market more than follow the manager (which can be good or bad), it also means less fees.
EG: They will buy shares from all of the ASX200 or something.
Over time they go up, but you have to be willing to ride out any downturns; I.E. Don't sell them during a crash, just hold them.
Thanks mate. sounds good. Profits taxed at the top rate though. Hmmmm
Bought some VG EFT's 2 weeks back. Have dropped 10% since recent crash.
Always happens to me for some reason.
But this is a long game - plan on holding them for at least 10 years…..but what a crappy start
I have recently set up my managed funds through a financial planner. Most planners will take a small % of the amount generated by the investment. My investment are managed by my planner (revised every 3 months) and are done through MyNorth Investment. Most planners will give the first one or two meetings for free to understand your needs. I'm very happy with my financial planner, Archie, who is with RightTrac Planning.
I hope you're comfortable with the fact that if you decide to leave your financial planner you will have to sell all investments in your wrap account. MyNorth is cheap but it still carries the stench of AMP. I sacked my financial planner when he recommended AMP.
"We throw all of our left over pay into the mortgage offset account."
Put their money here.
Keep a track of the interest your family actually saved and return it at maturity or if your mortgage ends before that
Gold, and/or silver.
Buy a safe, load it up, lock it and leave it.
If we get a financial downturn, your gold value will climb. If it becomes desperate, it's safe from banks and other market forces.
My prepper husband would also suggest investing in baked beans and toilet paper…
haha baked beans and toilet paper… It's certainly something my kids would be on board with!
Re gold, I don't know much about that… does the price increase with and beyond inflation, so after fifteen years it will have appreciated in value?
Thanks for your advice. I appreciate the different perspective.
buying gold is just about the worst thing you can do with your money.
From here
Gold
If you invested in gold in July 2010, your investment would have essentially stayed the same at this point. By May 25, 2017, your investment would be worth about $10,230. Gold, seen as a safe haven asset, has generally flatlined in recent weeks and months. On one hand, gold has performed exactly as a safe haven asset should: it has maintained its dollar value. However, a closer look reveals that this is not really true. In fact, accounting for changes in the market and for inflation, gold has actually declined somewhat in value. Can it still be considered a safe haven asset?
S&P 500
A $10,000 investment in a broad array of stocks from the S&P 500 in July 2010 would have done quite a bit better than one in gold. By May 25, 2017, you would have $26,037, according to data provided by Pension Partners. The S&P 500 has gained more attention than usual, perhaps, as hedge funds across the country have scrambled in the past few months to try to keep up with its returns. Suddenly, funds tracking the performance of the S&P appear more noteworthy than ever for that reason.
Name an asset class and I will cherry pick a timeframe and label it the worst thing you can do with your money.
I mean the writer used a 6 year and 10 month timeframe, that about says it all.
Since I think my kids are alright, I'd like to do the right thing by them.
lol, my kids are alright to
I guess we're luck, huh haha
Lucky *
If worse comes to worse, you could buy some Gold Bullion… that's got a really good chance to increase value above the dollar and inflation over long stretches of time.
waste it on deals on this site
Sage advice
Just beware of the fact that "unearned income" of children above a certain amount (check the ATO site) will be taxed at 66%
Wow, this is great to know. Thankyou
Generation Life have children investment bonds that may be of interest to,you ?
Sooo look into it. I wonder if this is taxed at 60% too though…
As long as you don't break the 125% rule (contributions can't be more than 125% of the previous year's contributions), then when you hit 10 years, money can be taken out without any further tax as the company holding the investment bond has already paid the tax each year (at 30%). Also doesn't need to be declared in tax returns or as assessable income for Centrelink. And in most cases, tax-free capital gains if vesting to a child. Also, at the 10 year mark, the money doesn't have to be withdrawn; if the 125% rule isn't broken, it can be kept going (including with partial withdrawals).
We have investment bonds set up with Australian Unity (Lifeplan Investment Bond) for the kids with a 50-50 split in Vanguard's Australian and International shares index funds.
The PDS for investment bonds on Australian Unity's website had some good examples of the 125% rule/how taxes work.
OP if you have a mortgage, put the $56k into the offset account. Calculate the interest they would earn and put it into the offset again.
I was actually thinking of doing this but thought it might seem ‘selfish’… just gotta make sure we don’t redraw it!
I would do it. Because you exponentially reduce the interest paying on your loan this should end up the best option, without the risk implied in anything that could earn you more. Return the money to the kids when they are older using something like 3% as the interest rate on their "accounts".
I was going to suggest this exactly. As a kid, my Dad kept our savings as if he were the bank and gave us a higher interest rate than the banks ever would. Looking back on it now as an adult, it was quite a savvy thing to do, he saved money on a mortgage rate higher than any interest rate a bank would pay out on, plus he was teaching us how things worked along the way. Sure the risk is you want to spend it, but he kept a bank book and everything to reduce the risk of this happening.
I think it's the easiest way and will possibly make effectively the biggest gains for your kids than anything else. Just make sure you calculate compound interest correctly! lol.
Thanks for your input. Omg I would feel soooo guilty if I tapped into it. I don’t think I would. I couldn’t ha sleep the guilt!
@Bellpop: Just to clarify, he didn't keep our money, he always allowed us to take money out when we wanted, just not sure if I made that clear, ha!
Exactly what I was about to propose to OP. :)
Noting that your interest paid on your mortgage is not tax deductible, the cash saving from your offset account will probably be about as much as you can reasonably expect to earn after-tax on investing the money elsewhere.
Thanks. Will look into it offsetting our mortgage a little more closely and report back
ETFs are popular.
One way of doing something like this is through Stockspot.
I’ll look into this. Thanks :)
I wouldn't be doing any type of investing with an inheritance.
Put the money in their dollarmites account (or whatever they have) and just let it accumulate interest.
I was expecting something a little more sneaky from someone with your username!
In my family, we use to buy a lot of gold from the middle-east and india.
Back in the old days my dad was good at smuggling that stuff into Australia. Wouldn't recommend it these days unless you can buy quality gold jewellery from India/Dubai/Saudi Arabia and bring it to Australia hassle free.
Given the findings of the Royal Commission, I'd say Dollarmites are out.
the interest is terrible on those accounts. definitely put it in a fund until theyre 18.
So that they can lose 2-3% on inflation for the next 10-15 years?
SO what?
Invest in Fortnite skins
Read that as ‘invest in foreskins’ 😭
only works if you're an Israelite
I've played Fortnite and am quite familiar with it, but thought the same thing.
Mercedes?
Put it all on black.
This is probably some of the worst advice i've ever read. Why on Earth would you do that? Put it on red!
I got some good advice from some old guys in a rotary club I was in…
Just let it sit there for a while. Get used to having that money, don't spend it, just let it become the new normal.
Then I would be putting it somewhere safe and just try and out do inflation slightly.
Thanks!
Put it in the mortgage offset and give them the interest you save and that is tax free. So if your mortgage is 5% for each year the funds sit saving you 5% you add that savings onto their "egg". If you invest it under their names they will pay 66% tax on any amounts earned over a minimal threshold ($600??) So 5% of $30k is $1500 so they'd earn $600+ 1/3 of 900 = $900 with the government pocketing $600. If you get managed funds you probably can only do that under your name unless your kids > 14yo. So then earnings fall under your income so you're paying tax on every $ earned (unless you're not working and then they get to use your tax free threshold). Say you're on 40% tier… That $1500 income is reduced $600 again + Medicare levy.
It's pretty hard to beat the mortgage offset.
Thanks heaps for the number crunching. Much appreciated. Seems like another +1 for the mortgage idea…
… and their 'egg' can also be another savings account under your name offsetting the mortgage. So you have one account (or two) where you have paid them their interest and that money is still offsetting your mortgage.
Bitcoin.
😳
the way of future!
Considering putting a small amount, maybe a quarter or less, of the inheritance into bitcoin is probably wise.
Dogecoin - make it cute fun for the kids
Diversify. 28k's not a staggering amount, but its enough to be interesting. I'd be looking at it as a learning experience. Maybe even let the kids pick a few stocks to get them excited about the financial world. Then maybe in 10 years, they can be giving you financial advice :D
Thanks for taking the time to comment. Will be interesting to see which stocks they choose, especially the three year old 👀
Yes. What will be really interesting is if the stocks do well. However much people like to dress it up, stock picking is almost entirely chance. The important thing is not what stock they choose, its the fact that they chose it. When people feel like they freely chose something, they put more effort into protecting that choice. In this case, the goal is not to make zillions. The goal is to get your kids interested enough in financial instruments that they want to spend the time to learn about them.
If you're going to do that, I would give them a list of the ASX50 or ASX200 and let them choose 10 stocks - so it's not all stuck in one stock.
I would definitely go with insurance bonds/investment bonds.
I would also hold it until they are 25 at least.
Yeah was thinking that too. An 18 year old with that much money. What could go wrong 😳🙄👀
Yes, I think most of us did lots of silly stuff when we were around 18yo. Not the ideal age to be handed a lot of money.
25 probably much better, 21 maybe, but most 21 year olds not much more financially mature/sensible than at 18yo imo
What’s the worst that could happen?
Have a great time in Europe with some of their mates ?
Make it clear when the time comes you aren’t bailing their arse out of jail.
yeah… if i was 18, even 21… i wouldve pissed it away for sure. wait until theyre 25. now that im older i care a lot more about my money.
I'm going to piggyback on @djkelly69's thread as this is the correct answer for kids investments due to the tax implications with other options.
The Barefoot Investor has a good write up in his book comparing the different options but I think you can also find it online.
We have an Education Investment Bond set up with Australian Unity for both of our kids which we are also actively topping up.
I've heard lots of great ideas for these sorts of nest eggs. Even a savings account where parents put money away for the kids each pay.
i.e. Not telling them about the savings, wait for a significant life event for them (wedding, buying a house). When the time comes, hand the savings over to them to cover some of the costs/deposit.
I am by no means an expert and haven't looked into this for some time, but I believe that article is comparing them to other investment options for adults, which it (quite rightly) deems likely offer a better return.
Kids however are taxed at a ridiculously high rate (66%?) each year after earning a small amount of income/interest (approx $416 or something when I last looked at it), so the options are fairly limited. From memory shares can't be owned by people under 18, can't recall if this is the case for managed funds as well.
Insurance/investment bonds are tax-inclusive (if you follow the rules) so effective rates of return are very attractive, investment is in the child's name so no issues with declaring interest, etc, and are more or less set and forget.
Yeah, the tax rate for kids is crazy. Wtf.
Tax implications of investing unless its over 10years I recall. Get that right because the taxman commth!
Will look into it. Thanks!
Answer:
Broadest Equity Index Fund ETF
Read this excellent book that shows the hidden costs of managed funds etc. as well as the fact that simple low cost index fund has beaten every form/class of investment asset over the long term:
https://www.amazon.com.au/Little-Book-Common-Sense-Investing…
Also: https://www.fool.com/retirement/warren-buffetts-super-simple…
Thanks!
The best thing is dont let the kids know about it until they really need it.
Good idea! House deposit!
Does the Aussie govt have anything equivalent to the UK governments Gilts?
No sure. Will research. Thanks
Put it into your mortgage fund.
Otherwise, Vanguard index funds is one that I have been advised.
Mortgage is looking like a strong contender. Thanks
I think you need professional financial advice, get some and use some of their funds to pay for it (if you don't pay for the advice, it's not worth what you paid for it)
Unfortunately some financial advisors make money by recommending certain investments, they won't recommend a vanguard account for example, rather they will recommend a colonial account which has much higher fees, and gives them a small kickback.
totally agree, so sometimes you need to see more than one to get a fair picture.
If you give them an extra $24K you can pool up and buy an $80K investment vehicle.
High yield, right
Precisely.
I would be putting it in managed funds. There is risk in anything, but I think the risk is pretty well balanced with managed funds.