“The latest interest rate cut is a movement in the right direction, but at least 80% of our clients will not see any tangible impact from this. They would still be over-indebted if interest rates halved from their current levels” says Luke Hirst, MD of South Africa’s largest Counsellor DebtBusters. As a registered debt counsellor, […]
22 October 2014
Is there a way that you can ensure your children will have financial peace of mind by the time they spread their wings and leave the nest? Ashleigh Brown looks at ways that you can make your children rich, and give them a head start in life.
It can be daunting taking the first steps into the ‘real world’ without any savings as a backup. When the playful days of staying at home, knowing that the fridge will always have something in it, and never having to deal with doctor’s bills are over, trying to just make ends meet can be difficult. But if you don’t want to kick your children out in the financial cold, there are things you can do to make the leap into adulthood easier.
If you save for your children it could give them the freedom to study, to travel a bit or even open that dream business they have always wanted. By the time they have a family of their own they will be more financially stable, as well as more financially savvy because they had a head start in life.
The various banks across South Africa all have dedicated children’s savings accounts, specifically designed for under 18’s. These accounts are there so that parents can pay money into them every month and help their children’ savings grow while teaching them the importance of finance.
Even though there are various different savings accounts and unit trusts available, these should always be paired with financial education. “As with learning something new, there are always gaps in your understanding of the topic that need to be learnt. As such children need to be taught so that they can understand the value of effectively managing money,” says Michael Daniels, head of deposits and payments at Standard Bank.
The value of saving
Daniels explains that money is in itself not aspirational, but rather a mechanism through which goals or needs can be met. By giving your child everything they ask for when they are young, it can create unrealistic expectations when they are older.
However, encouraging a child to save for what they want is an extremely valuable life skill as it teaches them that effort and discipline equal reward. Adding to this, introducing a child to electronic banking, the benefits of money management and how to use a debit card can be beneficial. “It is all about control, access, accountability as well as how to manage your money through various banking channels like Internet Banking or ATMs,” says Daniels.
“Remember, the objective is helping your child grow up with money and having an understanding of how it can be controlled and used to the best advantage. Children who have learned the basic disciplines involved are more likely to become young adults who understand money, manage it correctly and handle it effectively,” says Daniels.
While opening a savings account, teaching a child how to save and use all the banking facilities available to them, it’s important to teach them about how compound interest works and how it benefits them.
Danelle van Heerde, head of advice processes and tools at Sanlam Personal Finance, explains: “It’s effectively earning interest on interest on interest. So, once you have put your savings aside, however insignificant it may seem, you do not have to do anything, bar watch your money increase. It’s the best way for your money to grow over the long term.”
Saving for education
“Whether you are new parents, a single parent or an established family, the key is to start saving early. Life can be very demanding so parents have to be aware of the future cost of quality high school and university education. The later you start saving the more you will need to save per month,” says Old Mutual’s senior actuarial specialist Anele Mbuya.
According to the Old Mutual Savings and Investment Monitor, only 40% of South African parents are saving for their child’s education.
“This is alarming when you consider that a good education can end up costing hundreds of thousands of rands. Stats showed that people are tightening their belts and education is one of the main areas where budgets are cut,” says Sinenhlanhla Nzama, investments actuary at Old Mutual.
With education fees skyrocketing, saving for your child’s education has never been more important.
Mbuya highlighted that having a dedicated education fund for your child is the best way to save towards education. “To cover education expenses it is ideal to have an education fund because a parent can increase their contributions in line with education inflation,” says Mbuya.
As parents it would be wise to put money aside for children by starting a small monthly debit order of say R200, invested in a unit trust portfolio with high equity exposure, because there is a sufficient time frame to ensure that the money works for them.
Another way to save money for your children’s financial well-being is to set up a trust fund. This is where your assets are held for a set period of time, by a trustee in the event something might happen to you. The fund is created to make sure your children have enough money to live if you are not around to provide for them anymore.
For a more information on the different educational savings options available, please see our ‘Different Educational Savings’ article, click here.
Pension funds for kids
It might be a funny thing to think about, starting a pension fund for a child who could not be further away from retiring. But by starting this early, it helps alleviate some of the financial burden of saving towards a pension fund every month once they do start working. This also means that the money can grow over a long term without anybody being able to dip their fingers into it.
If you pay R200 per month into a retirement annuity fund for your child, for a fixed 55 years, at 10% interest, your child will end up with R4 754 337 by the time they retire.
The fund can be started when the child is young, but you would not be eligible for tax rebates on that money as the child would not be earning an income. However, if the fund is transferred over to the child when they start working, they would then be eligible for a tax rebate for the previous years.
Not only would the child have a large sum of money when they retire, but they would also not be able to touch that money for many years, meaning it would just keep growing. This also means that your child would be able to save more towards other things in their life, without having to worry about retiring.
Van Heerde explains how compound interest works:
- If you put R250 away monthly between 24 and 30 (years?), and then leave those savings in your account, you’ll be worth R479, 453 by age 65. This is based on an interest rate of nine percent (Van Heerde says this is calculated assuming six percent inflationary returns, plus five percent real returns, with two percent subtracted for fees).
- On the flip side, put away R250 between 35 and 65 (years?), you’ll only end up with R425,528. “The difference is in the extra amount of time that your savings have to earn interest or compound, starting at age 24 instead of 35 years,” she says.
- By putting away just R250 a month for your child when he or she is between the age of 5 and 10, and then leaving that money in the account, your child will have about R50,000 at age 20 – a great way to help pay fees.
- Or you can leave this to earn more interest, and by 65 your child will be worth R2.1-million.
- Compare this to your child starting to save for himself as an adult aged 25 – an active investment of R250 between 25 and 65 will only amount to R1.05-million.
“That’s double the saving, by simply putting R250 every month for five years, when your child is young. It’s not surprising, looking at figures like this that Albert Einstein referred to compound interest as the eighth wonder of the world.”
Saving for your child is not only a means of creating a safety net for them, but also teaches them good financial habits which will help them through the rest of their life. There are many different savings accounts available, which offer different returns on your investments. Consult your bank, or financial advisors for the best options for you.
Remember too to look at the costs and fees associated with the savings and current accounts offered to children. Some only only offer interest once the account has hit a certain amount, while others have fees that can eat into your capital if you don’t save enough. For more info, click here.
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