What’s the best way to save for children or grandchildren?
Making regular savings for young children or grandchildren can be a great way to help them head into adulthood.
If you give a child $50 a month from birth, and the investment earns 3% a year, it will grow to more than $14,000 by the time they’re 18. At 6% it will be more than $19,000.
Two readers are thinking along these lines.
“I am about to become a grandparent, and I wish to set aside a sum of money to invest to help with the child’s future education,” says Glenys.
Meanwhile, Heather says, “I have no children, but I have two nieces, aged 1 and 3. I’d like to save for their adulthood, so that I can contribute towards their university education, or a house deposit or whatever that first stage looks like.
“What should I do with this — just stash it in an account, or is there a better place? I know there are education funds, but my nieces might not want to go to uni, so something less conditional would be best.”
I agree with that last comment. Some savings vehicles for children require the money be spent on tertiary fees. But what if the young adult wants to start a business, or pursue a creative career? It’s better to keep their options open — something Glenys might also consider.
Where’s the best place to save the money?
Glenys has given this some thought: “The term of the investment would be around 15–20 years, so some sort of ‘growth’ option would seem to be indicated.”
She’s quite right. Growth managed funds invest mainly in shares. While they are quite volatile — as recent times have shown — they grow more over the years than lower-risk funds. Stick with them when markets fall, and they’ll come right.
However, when the child gets within about ten years of spending the money, it would be wise to move it to a middle-risk balanced fund, and within three years to a low-risk conservative or defensive fund. This stops the balance from dropping a long way close to spending time.
KiwiSaver offers these types of funds, but they’re not suitable for this sort of saving.
“My first thought was to use the money to seed a KiwiSaver account,” says Glenys. “But a quick check showed that buying a first home is the only way to get money out before retirement.”
However, you can make a managed fund investment that works like KiwiSaver but with the money always accessible. Nearly all KiwiSaver providers offer similar non-KiwiSaver funds like this.
For information on these funds use the Smart Investor tool on sorted.org.nz. Go to Compare KiwiSaver and Managed Funds, and then click on the latter. You can then compare funds at the appropriate risk level.
I suggest you scroll down and where it says “Sort by” on the right side, click “Fees (lowest first)”. Low-fee funds tend to be your best bet for getting good long-term after-fees returns. For more info, see the managed funds guide on fma.govt.nz.
Three final tips:
- The easiest way to save for a child is to set up regular contributions from your bank account.
- As the child gets older, show them how their money is growing, so they can learn about investing.
- Once a child is 18, it’s good to enroll them in KiwiSaver. From that age they can get the government contribution of $521 a year for those who contribute $1043 or more, as well as employer contributions. If the young person can’t afford to contribute — perhaps because they are studying — consider contributing for them to get the government bonus.
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This column is supported by the Financial Markets Authority to encourage women to take an interest in KiwiSaver and investing. Visit fma.govt.nz for more information. Mary’s views do not necessarily reflect those of the FMA.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.