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Financial dilemmas

What will you choose?

Financial planning for parents

Whether you’re helping them to buy their first home, repaying student debt or contributing towards a once-in-a-lifetime trip: there are many ways in which parents want to financially support their children. Putting money aside seems like the obvious place to start, but what's the best option? Do you want to invest or open an account in your child’s name? Make a choice in these 4 financial dilemmas when planning for your child’s financial future.

Dilemma 1. Should you save or both save and invest?

What will you choose? Do you prefer the safety and stability of saving or the higher returns yet riskier nature of investing?

Saving and investing

A. Saving

If you want your child to have access to the money within a few years, it’s usually smarter to save. If you intend to set aside money for your child from the moment they’re born, you probably don’t need access to this money until your child is 18. In that case, you have time on your side and are better off investing. That’s because investing has the potential to earn higher returns over the long term than saving.

B. Investing

Investing has the potential to earn higher returns over the long term than saving. And the earlier you begin investing, the better. If you don’t need the money for a while, say at least five years, investing could be an option.

If you want to give the money to your child sooner and still invest, you’ll need to find a solution that works in your specific circumstances. Ask an adviser for help.

Dilemma 2. Should you set up an account in your name or your child’s name?

What would you do? Would you open an account in your child’s name or save money in a separate account?

Account in your name or your child’s name

A. Child's name

If you open an account in your child’s name and deposit money into that account, your child will be able to access the money on their 18th birthday. You can’t take the money back or decide how your child must spend it. This might be a cause for concern. However, it’s also a good lesson in financial literacy, as you can show your child how the savings have built up over the years.

If you want to open an investment account in your child’s name, you’ll need to obtain authorisation from the sub-district court.

B. In your own name

If you have a savings account in your own name, you control how the money is spent. You can also choose when you give your child the money. This can be useful if you’d prefer that your child has access to the money only once they’re older.

But do be aware that you may need to pay gift tax if you gift your child more than the annual tax-exempt amount.

Dilemma 3. Should you make routine savings or deposit everything in one go?

What would you do? Would you rather make routine deposits into a savings account or deposit one big amount once a year?

Routine or everything in one go

A. Routine

Depositing an amount routinely, such as once a month, makes financial planning easier. That’s why many people choose this option. If you set up a standing order, that money will be deposited automatically. If you’re investing for your child, routine investment spreads your investments – and the risk – over time.

B. All in one go

If you put money towards your child’s savings goal only once or twice a year, you might forget to transfer the money or find you can’t quite afford it at that moment in time. That’s why it’s a good idea to plan the date on which to transfer the lump sum, including if you want to deposit more at the end of the year.

Dilemma 4. Should you plan your deposits or put money aside as you go?

How much should each deposit be? Do you prefer depositing whatever you feel comfortable with or depositing a set amount based on a financial plan?

Plan your deposits or put money aside as you go

A. Put money aside as you go

If you’re putting money aside for your child, you should consider how you’ve calculated your deposits and whether they’re enough to reach your savings goal. After all, you don’t want to save for 18 years only to find you can’t fund your child’s education. To avoid disappointment, it can be helpful to calculate the costs of raising a child and use that as a guideline for your deposits.

B. Plan deposits

You’ll reach your goals sooner if you’re saving for a specific reason, such as paying for your child’s education. It can help to make a list of the costs of raising a child and look at how much money you want – and can afford to – set aside. This means you know exactly why you’re saving, giving you greater control over your savings plan.

Understanding and tracking your income and expenses is a first important step towards creating a realistic savings plan.

Insight into your income and expenditure

Saving and investing for your child is a great idea, but it all depends on how much you can spare each month. That’s why understanding your income and expenditure is fundamental to your financial plan for your child. If you’d like to gain an insight into your finances, make a free appointment with one of our advisers.

Investing involves risk

Remember that investing involves risks. You could lose all or part of your initial investment. You should only invest money that you don’t need, after you’ve set aside your buffer for unforeseen expenses.