Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
Question
I’m married with two children, aged 1 and 2 years old. What’s the best way to invest money for them to access when they are older? My friends suggested opening a bank account and depositing any cash the kids receive as birthday presents etc. What do you think?
Elle Bee
Firebug’s Answer
Hi Elle,
I love where your head’s at when your children are so young. Not only will you be giving them a financial head start in life, hopefully, they will realise the power of investing and compounding when they receive the gift many years from now. Or worst case scenario, they become Carlton supporters and you’re forced to cut all ties, at least the money would have grown for you over the years 😜.
You really need to make a decision on two things.
- What you’re going to invest in?
- Whos name it’s going to be held in?
You have a lot of choices when it comes to investing. You could keep the money in a high-interest savings account (HISA). But this is a very risk-averse asset class and not something I would do. You have years at your disposal with the beneficiary not having to rely on this money to survive. They might not even know it exists if you should choose not to tell them. This makes it easier to manage two things, risk tolerance (your kids don’t even know it’s there) and volatility (20 or so years should see a bust/boom or two).
With this in mind, I plan to invest in the Australian market via A200 (Betashares Australian index) for my kids. Switch DRP (dividend reinvestment plan) on and return in 18-21 years and marvel in the glory of compounding that has turned your children birthday money into a nice size deposit for a decent car or house (depending on how generous Nanna is with her birthday day money). The simplicity of the A200 with DRP on is an easy choice for me. If you’re into more diversification I would look at Vanguard’s VGS with DRP turned on.
I like this option because it requires no effort (other than a tax return) for the parents and it will beat the pants off a savings account, returns wise, over a 2 year period! Both the A200 and VGS don’t require rebalancing and with DRP switched on it couldn’t be any easier.
The other big question is to figure out whose name the investment is going to be held in. You can technically invest in a child’s name but it’s a muck around with the tax file number and setting up an account. And depending on how much income the assets are going to generate, it might not be the most tax efficient method.
If you already have a family trust set up, I would use that as the investment vehicle. Trusts cost money to set up and can be confusing though.
If you don’t have one already set up, I think the best way to do it is to open an account in the lowest income earner parents name and just keep a spreadsheet when you use gift money to purchase shares for your child. Even if you use the same account to buy shares for yourself, what you can do is keep a record of when you bought, what you bought and how many units you bought. You can then use a reporting tool such as Sharesight to create a dummy portfolio with those exact trades 20 years later and work out how much the initial investment has grown over time.
Then you can give them a big surprise when the times right!
-AF
Question
Im 47 and I have been saving away since before FIRE was a term. My savings rate is about 50% losing 13% to interest on IP’s which is slowly coming down. Realistically Im about 5 years away from making the big change.
My issue is I am 99.5% in property I want to diversify but I am not sure how to do it and not sure of how to allocate my splits.
I am torn between Property, High-Interest accounts, Stocks (ETF,LICs etc) and even bonds. I don’t want to sell off property just work towards a better balance over the next 5+ years.
Thanks
Joe
Firebug’s Answer
Hi Joe,
Nice savings rate!
Losing 13% interest form the IP’s you say? How much are you dipping into your pocket each year 😱? An asset should not be taking money from your wallet, it should be putting cash into it!
I’m feeling ya with the diversification mate. As someone who has three investment properties myself, it’s important to spread your risk across multiple asset classes and sectors.
If I were in your position, I would look at the cash flow of your property portfolio and how much the going market rate is for them. Would you make money selling now? How much?
It all depends on all your goals, but if you’re planning to build an income stream for yourself, negative gearing properties will not be the answer.
You don’t have to sell either. Nothing stopping you from dipping your toes into some ETFs or LICs to get a feel for the stock market.
-AF
Question
Hi AFB,
Great podcasts and website. Loving the content.
In your “Our investment strategy explained” you mentioned the Peter Thornhill approach to investing and said this is something you might look into. This strategy of investing for dividends makes a lot of sense to me also but goes against the traditional diversification. I like the idea of reinvesting the dividends until FIRE and then simply living off them. No need to sell off capital growth.
Just wondering if you will actually consider switching to this approach? If you don’t think you will go this way, is it only because you have set up the way you have already? If you were starting out again would you consider it?
Cheers,
Steven
Firebug’s Answer
Hi Steven,
I have indeed modified my strategy to be more focused on dividends. I currently hold nearly $100K in international securities (VTS+VEU) and I think I’ll try to aim for 10% international with the other 90% Australian to maximize the strong yield + franking credits. I’m in the middle of writing a post about ETFs vs LICs which explains what I will be investing in to achieve this investing split.
The only issue with this is the whole diversification thing. I’m still on the fence on that one because there is just too much academically acclaimed studies that continually stress the importance of global diversification. I think it’s just a risk I’m willing to take at this point to get that desired income stream I’m after. I might change my mind on this moving forward as my mind is never set in stone and when I read something that is better than what I’m doing, I have no issues pursuing it. I did go from property > ETFs > ETFs/LICs after all 😜! Never be too proud to judge your own strategy and tweak it where you feel necessary.
-AF
For the first question about investing for your kids, an alternative might be using an investment bond instead of investing in someone else’s name or in a trust. The investment bond pays tax at the company tax rate and there is no impact on anyone’s tax statement so if both parents are on a higher marginal tax rate then this might make sense. I’ve setup separate investment bonds for each of my two kids.
Not ganna lie, I had no idea these investment bonds existed. After a solid 2 hours of Googling, I have concluded these to be a fantastic alternative. So much so I’ve scheduled in a podcast about it because I’m really interested in the possibilities they offer. Thanks for the tip! I’ll be emailing Elle Bee with this update.
Glad I could help! There are lots of different providers, Greg has mentioned some of the main ones below. One of the big advantages is you can put in smaller amounts on a regular basis which probably suits mum and dad putting in money for their kids, or you can just do a one off like a gift from the grandparents, either way you don’t pay any brokerage fees which is another win.
There are some trickier aspects like the 125% rule and the different tax treatment on withdrawals depending on when you do so but but they’re definitely good for a lot of people.
Recommended companies that do this well to have a look into mate?
The main ones I’m aware of are Australian Unity, Comminsure, GenLife and AMP but there are probably a bunch of others. Obviously do your own research, seek out professional advice etc.
+1 Genlife
Thank-you for your blog. It is amazingly satisfying to have a joint financial goal with your partner, which, although alternative to the norm, you both believe in. I should have started investing early enough that I would have a dividend income during maternity leave. I know this is a time many women feel dependant on their partner for income. Once I understand investing and see the effects myself, I would like to make a women-focused blog, encouraging investing for alternative income for women of all ages.
Hi Firebug, do you keep your financial plan secret in your work place?
Yep. No one knows 🤫
Hi Firebug,
Love your work. Re investing for your kids, I assume you’d wait until you had a certain amount of money before buying A200 shares, and then again for making additional purchases, rather than just after each birthday / Christmas etc. What sort of amount would you be looking to invest at a time?
Hi Cathy,
This question actually uncovered a new product that I was unaware of previously which are investment bonds. I’ve been reading like mad about them over the past couple of hours and am very excited. They look like the real deal and something I plan to write about in the future. Have a Google of Investment Bonds.
Hi AF,
Usually I am on much the same page as you, but in the case of Elle’s question I rather strongly disagree. For most people investing/saving for kids is small amounts on a regular basis, in which case direct investment in an ETF is not the answer due to brokerage costs being a significant % of the small regular “deposits”. Your suggestion is more appropriate if there was a lump sum which they want to put aside till the child turns 18 or 21 or whatever.
As you mentioned, ownership and the tax implications are also major consideration. Although you have addressed these reasonably well, the majority of people do not have a trust with which to manage this. Without a trust the simple answer is to invest in the name of the parent with the lowest income, however will that still be the case in 15 or 20 years when you have to deal with the transfer of ownership to the sibling and the resulting CGT? Maybe, maybe not.
One option to consider is a managed fund, such as Vanguard’s LifeStrategy High Growth Fund or Index Australian Shares Fund which allows deposits of as little as $100. While the costs are higher than an ETF there is no brokerage which makes it better for regular small investments. While this still has ownership and tax implications for most it is better than direct ETF investments. Another down side is the need for $5k to start the fund.
https://www.vanguardinvestments.com.au/adviser/adv/investments/product.html#/fundDetail/retail/portId=8127/assetCode=balanced/?overview
https://www.vanguardinvestments.com.au/adviser/adv/investments/product.html#/fundDetail/retail/portId=8129/assetCode=equity/?overview
Another option is to use StockSpot’s new investing for kids option. You can read more about that here:
https://blog.stockspot.com.au/kids-invest-for-free/
https://www.stockspot.com.au/investingforkids/
Now the best for last… An investment bond. Sadly I did not know about these until recently when I started following the Barefoot Investor. I now recommend his book to anyone that will listen. This month he is also releasing a new book called the Barefoot Investor for Kids which is likely to answer all Elle’s questions and then some. My kids are now 20 and 21 so I cannot take advantage of an investment bond, but if you want to invest for at least 10 years then for many this is the best option. The 3 recommended by the Barefoot investor are: AMP Growth Bonds; Lifeplan Growth Bonds (from Australian Unity); and Generation Life Lifebuilder Bonds.
Well, that’s enough from me for this week.. 🙂
Thanks for the comment Greg. I was unaware of these investment products but after a quick Google, they appear to be the way to go. I’ll investigate this further because I feel not enough people know about them (myself included before this post).
Cheers
Bang on the money with respect to Investment Bonds. But as with everything investors need to keep an eye out on the fees. Aust Unity’s products include Vanguard index funds as an investment option which of course had the lowest fees out of the suite of products they offer.
I found this site gave me the best explanation on how they work.
https://www.moneysmart.gov.au/investing/complex-investments/investment-and-insurance-bonds
For investing for children, instead of keeping a journal etc to keep track of my child’s investment, I invest in 1 ETF only for him VDHG solely and then use several other ETF’s for my own investments. Helps keep things simple and separate.
Regarding investing for kids Ashley Ormond wrote a great book on this called “how to give your kids 1 million each” using LIC’s predominantly with REIT and ETF’s as extra’s..The basics were to pick the 4 biggest LIC’s (AFIC ARGO etc) and make regular monthly deposits to the kids accounts (atf for minors). You simply reinvest dividends back in to their funds and compound over time…It uses $1 per day strategy and gives them a dividend income later in life (1 million reached at age 50 based on $1 per day!!!) Iv’e been doing this for a few years for my 2 boys and can see the strategy working…the kids have time on their hands so it’s the magic of compounding 101!!!
If you buy AFIC using a minor trust account and turn on DSP rather than DRP or declare all DRPs each year in minors tax return, then you avoid CGT on transfer of shares to your kids when they turn 18.
I am really enjoying your podcasts.
My question is in regards to holding ETFs and/or LICs in your industry Superannuation. My Super allows me to choose shares including ETF/LIC.
Is it a worthwhile strategy to hold ETF/LIC in Super given that the bulk of my Super money is already invested in a Balanced fund (International/Aust shares). A part of me feels that holding ETF/LIC within my Super is just a double up on what I already hold, whilst another part of me thinks it may be a good strategy to start to build ETF/LIC within Super as I prepare for retirement in 5 years time.
Are you wondering if ETF/LICs are diversified enough? I have one investing strategy that I try to mirror inside and outside of Super. If I think high dividend paying ETF/LICs are the best investment for me (I do), I will invest like this both inside and outside of Super.
many rich people don’t retire, they continue to work though they could FIRE. What do you propose to do when you reach FIRE? Early retirement is known to be associated with relationship failure, just like a huge lotto win
Those are the lucky few I guess.
I quite enjoy my job, but there’s a lot of bullshit that comes with it. The meetings, dickhead managers, pointless reports, politics etc. The problem-solving aspect of my job is fantastic and I thoroughly enjoy it. I suspect that when the time comes to pull the pin, I will reduce my work hours significantly… maybe altogether.
I don’t plan to ever stop ‘working’. It will just be work that’s always interesting and enjoyable. And that might mean that it’s unpaid work. But since I’m not going to have to rely on a wage, that’s totally cool.
Re the comments on investment bonds, I’m with Austocklife… where we can find some of dear index funds…
https://www.genlife.com.au/