Childrens' birthday and Christmas money proves a real dilemma in our household.
Granny gives the kids a $100 cheque each birthday and Christmas; in our family that’s not all for blowing on expensive toys. I’ve schooled the children into believing it’s to be saved for purposes such as university fees, their first car, or the deposit for an apartment.
It worries me that this growing sum of money (more than $1,300 for the oldest child) is being eaten away by inflation. So I’ve been doing some research about whether to invest it into their Kiwisaver accounts.
On one hand it makes sense to lock the money down in Kiwisaver until they want to buy their first home (or student apartment). But as my colleague Mary Holm pointed out to me, that reduces their choices in life. They can’t use it to pay for their university fees, which is a valid reason to dip into long-term savings.
The other question that was posed to me is should young people be steered towards buying their own home? I believe so, but not everyone does – and maybe my children won’t.
Over and above these dilemmas, the problem with Kiwisaver is that the fees are no longer subsidised for kids. That means the kids aren’t necessarily going to see their money grow – which is important for both hard cold financial return and also the financial education value of making such a move.
What about investing it in shares or managed funds, which are both good for their financial education. With young children I lean towards buying individual shares in a company they understand such as Pumpkin Patch. My first investment – aged about 12 - was Winstone shares. Funds are wiser when it comes to spreading your risk, but more difficult for younger children to understand.
Another option could be to invest the money in bonds (debt securities), which although riskier than a savings account, pay a better return. I don’t, however, relish the idea of explaining how they work to primary-age children.
Even if the money isn’t invested in shares, funds or bonds, I do believe it’s my duty to move this money into a higher earning investment than the paltry 2.75% they’re getting in the account that granny opened for them at the ASB .
The obvious choice would be move it to RaboDirect where kids’ accounts get a 4% return currently. Even better, considering it’s a longer term investment would be to put it into a term deposit, which are at the time of writing paying up to 6.7%.
The conclusion to this is that I need to pull the mum and kids’ discussion out of the “too hard basket”. The best thing to do with their money for now is to invest it in a higher-interest savings account, term deposit, or even shares or managed funds, which children do need to be introduced to.
Here are some interesting articles on the topic on the RaboDirect blog