Your kids' money

Reported by Susan Hely
Tuesday, April 3, 2007
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By Susan Hely, Money Magazine, April 2007

Don't kid yourself — children cost a lot, and to meet some of the big expenses such as total education costs, you need to save often and aggressively to outpace inflation.

So how much will it cost to bring up a child?

The average family will spend about $295,000 to raise one child and $500,000 to raise two children up to the age of 20. The figure takes into account most of the costs involved in parenting including housing, transport, recreation, food, clothing and education.

Older kids cost more
You might think that you spend more on babies and young children because of all the new equipment: cot, pram, car seat, high chair, stroller and toys. But the costs accelerate rapidly with the age of the child.

For example, food costs are low when a child is aged zero to four, but jump five times when they are ravenous teenagers. Teenagers also spend more on transport, recreation and clothing, too. Expect to pay twice as much for older teenagers, in the 15 to 17-year age group, than for very young children, irrespective of the income of the family.

Don't forget that kids are leaving the family home and entering the workforce later than before. Almost half of all 20 to 24-year-olds live at home with their parents and even among those aged 25 to 43, 12 percent live at home, according to official figures.

It makes good sense to budget, save and plan for your children's major costs. Invest as much as you can each month and then add lump sums when you get a windfall, a bonus, a tax refund or a gift.

Funding your child's future
The best strategy for your children and their future could be sorting out your own financial affairs, such as paying off the mortgage, building up your superannuation, sticking to a budget and building up your assets, says Scott Alman, financial planner and founder of the Queensland-based Alman Financial Planning Group.

"Before you start thinking about your kids' finances, look at your own to see if they are in order," says Alman.

Alman frequently sees grandparents and parents who want to build up savings to pay for a private school education or put money aside to nurture a child's special talents, such as dancing or music or, when they turn 18, pay for an overseas holiday, a car or a property.

"Before parents consider saving and investing for their children, parents need to ask themselves what they are trying to achieve," says Alman.

"Do they want to build a large sum to pay for university fees or help them buy their first house? Or do they want to put aside small amounts as a gesture of their love?" He suggests parents look at saving for their children in the context of their overall financial plan.

Diversified index funds
In many cases a diversified managed fund — preferably an index fund — is the perfect investment vehicle for kids' savings. "If parents or grandparents have a serious goal, then an indexed managed fund is much better," he says. He likes index funds because they have a much lower turnover of shares and less capital gains tax to pay.

Most managed funds do not allow investments to be held in a child's name, but generally they will accept applications if an adult acts as trustee for the child and the trustee provides their own tax file number.

Direct shares are also attractive investments for children, but again the investment may need to be held in the name of a trustee.

Save through super
If a grandparent or older parent is 50 now, they could put aside some savings in their superannuation fund where it is taxed at a maximum of 15 percent, or much less depending on franking credits.

When the money is paid out — say when the grandparent or parent is 60 — there will be no tax payable under the new superannuation changes that were passed as legislation in early March and come into effect on July 1 this year.

Saving for education
Education costs are one of the major expenses of bringing up children. Just what sort of education you choose — be it government, independent or private — will have a huge impact on your own wealth.

According to a new book, How to pay for private school fees (and still have money in the bank) by Jonathan Cattana, you could be spending $45,000 a year to send your child to a private school by 2017 — just 10 years away. Why so high? Over the past 15 years, school fees have increased at two-and-a-half times the inflation rate, largely to meet the higher building and technology costs.

The Australian Scholarship Group estimates that a child beginning preschool this year and going to year 12 will be facing a bill of $101,126 for a government education; $185,248 for a denominational education and a whopping $334,188 for a private school education.

To work out how much you need for your child's education, visit the AMP's cost of education calculator (www.amp.com.au).

Before you start saving for your child's education, ask yourself: what are my goals for my child's education? Do I want to save for my child's secondary or tertiary education? If you are saving up for university fees, you have time on your side and you could tap into the power of compounding over that time. If you are saving for high school, you will have to put more aside early on to pay for fees that can be 12 years away.

For the super-disciplined saver, the key to funding your child's education is start early and save regularly. Each month put aside an amount even though there will always be places for extra cash such as mortgage repayments, childcare costs or adjustments to your income as you stay home with your children.The earlier you start the less money you will need.

Scholarship funds
Education savings plans offer a scarce tax advantage. Few investment products enjoy a tax concession unless it is going to help people save for retirement through superannuation or a child's education through an education savings plan. Three friendly societies that the tax office allows to rebate all the tax paid on investment earnings at the maturity of the "scholarship plan" are Australian Unity, Commonwealth Bank with Lifeplan and the Australian Scholarship Group (ASG). The biggest education savings plan provider is the not-for-profit ASG. Under the Tax Act, the ASG gains concessional tax treatment for the education benefits paid to nominated students when they receive their scholarship allowance. Also, while the investment remains in the plan, there are no annual tax return obligations for you or your child.

One of the most tax-effective ways to use an education savings plan is for university fees rather than school fees, because when the child reaches 18 they are not taxed at the child's tax rate.

The Commonwealth Bank's education savings product, launched in early 2005 through a tie-up with friendly society Lifeplan, offers diversified investments and high-growth investment options, as well as capital-secure and balanced choices.

There are no entry or exit fees and investors can add to, or withdraw from, their plan at any time — although withdrawals for purposes other than education expenses do not qualify for the education tax benefit.

If you like regular savings plans, why not try investments with lower fees than education savings plans. Exchange Traded Funds are listed index funds with fees around 0.28 percent, or Vanguard's diversified balanced funds charge a fee of 0.9 percent. But they do not get the special tax benefits of a scholarship fund.

Learning about money
Most people's beliefs about money are formed when they are young. Every generation has a different set of money experiences which they apply to their own lives.

The kids of today typically buy food, clothes, entertainment and expensive electronic devices when they first come on the market. But, sadly, this new generation doesn't have much sense when it comes to money — particularly how to manage it. The challenge for parents is to teach their children some money sense, most importantly about delaying self gratification.

Role of the parents
When kids are little, teaching them about money can be pretty straightforward. You buy them a money box and encourage them to save some of their pocket money or cash from odd jobs around the house or birthday and Christmas gifts.

One way to start them managing money is to give them some pocket money and encourage them to save part of it. Some parents go a step further and double their savings at the end of the year. Or if they are saving to buy a big item, they will meet them halfway.

There are some terrific kids' savings accounts that have incentives of high bonus rates if children save regularly and don't withdraw their savings. The BankWest Kids' Bonus Saver for example, pays 10 percent if deposits are between $25 and $250 and no withdrawals are made each month.

For many kids today the money comes and then, more than likely, it goes. "The combination of a mass of products and services that are becoming the norm for our kids — such as MP3 players, mobile phones, ring tone downloads, SMS voting, designer clothes and sneakers — with more and more opportunities for credit, means that our teenagers are at greater risk of getting themselves into debt than ever before," says David Liddy, managing director of the Bank of Queensland.

For the complete story see Money Magazine's April 2007 issue. Subscribe now.

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