We all know we should be saving, whether it’s for retirement, education or that proverbial rainy day. As adults, we often believe we’ve missed the boat, and feel we can put it off a little while longer. But there is no greater gift you can give your children than saving for their future, at the same time teaching them about the crucial importance of starting a savings plan from a young age, says Helena Conradie, chief executive officer at SATRIX.
[if this is boring, just look at the graph – it’s the most important bit]
“The earlier they start, the more capital they are likely to accumulate over a lifetime,” says Conradie. “Even small amounts put away now can make an enormous difference years from now.”
There are also several unintended, but positive consequences of showing your children how to save:
- It will teach them discipline. By setting up a debit order for them, they will learn about the importance of a recurring commitment. In a world of instant gratification this may be a difficult, but necessary lesson to learn. Putting in place good habits when your children are young will help to reduce anxiety in early adulthood.
- They will learn about financial markets. Like it or not, everything revolves around money. Despite the bad rap that financial institutions sometimes receive, they are still the allocators of capital and through investment in the stock markets, they allow the man in the street access to returns far exceeding those of bank accounts. By being in the market from a young age, children become comfortable with the ups and downs of financial markets.
- They will learn about the power of compounding. You’ve probably heard this many times before. To illustrate how important it is when you start saving, as opposed to how much you save, consider the following three scenarios:
- Luke’s parents started saving R5000 per year for him when he was five years old. When he was 15, they stopped contributing but encouraged him to let the investment grow until he was 30.
- Fatima’s parents contributed R5000 per year from age five to 30 (lucky girl!).
- Thembo’s parents started investing for him when he was 15 and contributed up to the age of 30.
The following graph shows which scenario delivered the best return through compounding, and clearly shows that starting early is far better than starting late:
What type of return is achievable?
Over the past five years, the JSE Top 40 Index has provided in excess of 16.5% per year. An index-tracking fund such as the SATRIX Top 40 Fund will provide the same return – since it tracks this index. “It is important to remember, however, that past performance is no guarantee of future returns. When we did our calculation in the example above, we made the assumption that the money invested grew at 10% per year,” says Conradie.Â
How to invest for your childrenÂ
You know you need to save for your kids, but where do you start? The simplest place is with an index-tracking fund. There are several stock market indices to choose from and you can invest as little as R300 per month or a lump sum of R1000. You can invest online at www.satrix.co.za.
“You can open the investment in your child’s name. As the parent, you will need to sign all instruction forms until your child reaches the age of 18. From then on, they can sign all instructions, provided they have sent their FICA documents to SATRIX,” says Conradie.
Children and income tax
Believe it or not, minors (children under the age of 18) pay income tax. If an investment is in the name of the child, and the income is more than the annual tax-exempt amount, the child must register as a tax payer and submit a tax return.
If you keep your children’s investment in your own name, you will be liable to pay the tax on income at your marginal tax rate. Essentially, this is your investment until you give it to the child, at which point it becomes a donation, which may have other tax implications.
“With the festive season around the corner, parents are wracking their brains about what gifts to get their children, but saving for them, and teaching them how to save, is a gift they will certainly thank you for later. Instead of spending money on plastic toys and electronics, why not give them a real leg up for the future instead? As we at SATRIX always say: just start,” Conradie concludes.
