Parents often set aside a few hundred dollars in a bank account when their child is born.
Grandparents, godparents and other relatives will contribute, and parents will let that money sit in a term deposit to accumulate interest over time.
But Michael Ashton, CEO of children’s investing platform iTrust Invest, told Yahoo Finance that with interest rates at an all-time low, leaving money in a bank account isn’t going to give your child the best value.
“We live in a world of record low interest rates,” Ashton told Yahoo Finance.
“If you’re saving into a bank account, 80 per cent of accounts are losing money because they get overtaken on inflation.”
“Whereas there’s virtually no asset class that could outperform equities over the long term - much higher than you could ever get from a bank account.”
According to the iTrust chief putting $1,000 in a bank account for 10 years will only see it turn into $1,397, but putting it into equities can reap anywhere between $1,692 and $2,119, and $3,395 if invested in a diversified fund like Magellan Global.
How much money should I invest for my child?
In terms of how much money to set aside into an investment, Ashton said every circumstance is different.
“What we’ve noticed [at iTrust] is grandparents tend to put in the most, around $1,000, when a child is born. Parents are a little bit less, at around $500, and godparents tend to be around $1,000.”
“But, most people tend to start with $1,000 and then they’ll set up $10 per week or $50 per month recurring deposits of that nature.”
And if you’re wanting to help your child get onto the property ladder in the future, the more you can add to the investment, the better.
“The earlier you start the more compounding [interest] you get,” he said. “Putting in $1,000 when the child is born is worth four to five times as much as if you put it in when the child is seven or eight years old, because the compound interest accelerates the interest.”
Where can I start investing?
Ashton said saving up a few thousand dollars and heading to a broker can be an avenue, but warns it’s tough – and expensive – to invest for a child that way.
Some funds charge a minimum $500, or even $20,000 initial investment, and there are ongoing management fees and trading fees that parents need to be wary of too.
Parents would also need to invest in their own name, and then transfer the funds to their children when they come of age - which also comes with a fee.
“That’s why we saw the niche for our product [iTrust],” he said.
Are there any risks?
While investing will get you more money, it also comes with a little more risk.
“If you buy individual shares, the issue is whether, over the long term, they’ll always exist,” the iTrust CEO said.
For example, back in the day things like ‘National Mutual’ and ‘FAI’ used to be the big blue chips in Australia, according to Ashton, but they don’t exist anymore.
“Also, things like AMP, which 10 years ago would’ve been good as gold and you would’ve put your retirement fund in there, has now crashed through the floor.”
But if you steer clear of individual shares, you can alleviate that risk.
“I personally wouldn’t buy five shares, dump the money and let it sit there for 10 years for a child, because markets could erode.
“Kodak was about $150 a share and now it’s $3. You never know what’s going to happen.”
But managed funds and index funds on the other hand, Ashton said, regularly update their holdings depending on performance.
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