Hi Mum and Dad - Can I Have Some Money?
Although some parents are dead against it, many like the idea of giving their kids a bit of assistance to get started into adulthood. For some parents, this means helping out financially while their kids are studying at uni or TAFE, or making a financial contribution towards the costs of a wedding, the first car, or even the first home.
Given that University degrees are expensive – north of $25,000, and house deposits typically much more that this, providing a financial helping hand as well as looking after your own financial position can be a real balancing act.
Regardless of whether you are looking at a new car, house, wedding or degree, one thing is for sure – the earlier you start saving, the easier it will be.
But before you go handing the dollars around willy nilly, make sure your own finances are in order.
A great place to start is by making sure you are on top of your own cashflow. To help with this, you may find our Budget Calculator useful. This will help you know how much money you have to work with, while keeping mortgage repayments, superannuation contributions, and living costs in perspective.
Once you know what is happening with your cashflow, the next step is to take advantage of compounding. The rule of thumb with compounding is simple - the earlier you start, the more compounding will work in your favour.
For example, if you begin a savings plan as soon as your child is born, you may have 18 years up your sleeve before university or 25 to 30 years before a house deposit is needed. To see how much a small regular savings amount can grow to, put your numbers into the Savings Calculator.
If compounding is a foreign concept to you, you can learn more about it in the Cashflow and Compounding module.
Without wanting to discourage you from saving for your kid’s future, if that is what you would like to do, it is important to point out that this seemingly simple concept does come with some complexities.
Ownership and Taxation
Some parents think that setting up an account in their child’s name is the way to go. However, depending on how much money we are talking about, this may not be the most attractive option from a tax perspective.
For example, a minor (child under age 18) does not benefit from the $6,000 tax free threshold. Instead the minor can face tax rates of 66% and 45% on investment income.
If a minor is eligible for the low-income tax offset, in the 2010/11 financial year, a minor could earn up to $3,333 in income before they will have a tax bill, a long way short of the $6,000 provided to adults. To generate this amount of income, a cash account paying 6%pa would require a capital balance of $55,550.
Alternatively, the investment could be held by the parent in trust. In this case, the tax will be paid as if the parent owned the investment, and is therefore dependent on the parent’s personal income position.
If you are investing a relatively low amount of money, holding the investment in the child’s name may provide a preferable tax outcome. Whereas, if it is a larger sum, holding the investment in the parents, or even grandparents name, might be more effective from a tax perspective.
Importantly, when looking at tax implications, there are a range of potential implications, and therefore, speaking to an appropriately qualified professional adviser is certainly worthwhile and recommended.
In regards to the actual investment options, here are a few to consider:
- Direct shares;
- Mortgage reduction, then withdrawn when needed;
- Education plans;
- Managed funds;
- Online savings accounts; and,
- Investment bonds.
These different investment options and investment vehicles have a range of pro’s and con’s which are dependent on your personal circumstances.
If you do want to look at strategies for helping your kids make a headstart into adulthood:
- Do your research and understand your options. You can use the knowledge centre learning modules to assist with this;
- Make sure you are on top of your cashflow, investing, tax and risk management; and
- Don’t be afraid to seek professional advice. The cost for doing so is likely to be outstripped by the benefit of getting a strategy which is just right for you.
Finally, before you give your kids nothing or everything, keep in mind the wisdom of Warren Buffett - "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they feel like doing.