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If you’re putting away money for your child’s future, how do you decided what strategy will offer them the best outcome?
Many parents hope to assist their children and help provide for their future by contributing financially. But with many Australians facing fresh economic uncertainty, concerns about superannuation and funding their retirements, as well as skyrocketing house prices, the question of how to do this without compromising your own financial security can be challenging.
Stevie-Jade Turner, Lead Financial Adviser at Tribeca Financial, has seen investment planning for children become a lot more prevalent among her clients in recent years.
“Five years ago, a lot of clients assumed that whatever wealth they built and had leftover their children would inherit”
However, she says concerns have shifted in recent years to be more focused on helping their children now rather than through inheritance later on.
“It’s become a lot more of ‘I’m scared my child won’t be able to afford a house’”.
What do you want to achieve for your children?
Ms Turner says that while many conversations with clients begin this way, it’s important to be clear on what you actually hope to achieve for your children.
She asks her clients: “what exactly do you want to be able to give your child? Is it a house? Is it a deposit for a house? Is it private education? What are you trying to achieve through the savings and through the investment?”
By having a clear ambition in mind and considering a variety of options, you are more likely to find a solution that benefits your children – even if it may not look like what you had in mind.
Property isn’t always a safe bet
The great Australian dream of home ownership often means that parents believe that helping their child get a foot on the property ladder – whether by assisting with a deposit, purchasing a property for them, or paying off the family home to leave to them – is the best investment they can make for their child. And with property prices skyrocketing across the country, many children may be looking to their parents as their most viable avenue to home ownership.
But Ms Turner explains that in fact, property is just as volatile as shares, but because it is a tangible asset we often believe it to be more stable and reasonably immune to risk.
“Quite often we feel that shares are really risky because we get a price update on them every minute, of every hour, of every day but if we had the exact same price updates on a property we would see similar fluctuations.
“If you’ve invested in property and it’s going through the roof, you’re seeing a really great trajectory it’s great when its doing well, but if it ever does the opposite, it will swing back just as much.”
Another factor to consider if you’re considering purchasing property for your child is that they simply may not like what you buy.
“Maybe your child wants the freedom and flexibility to buy something that they choose, so perhaps locking all your investment away in a property is not the smartest thing for you and might not be something your child wants long-term”, says Ms Turner.
Above all, it’s important to realistic about what you can achieve without overextending yourself or locking yourself into a situation that may disadvantage you if your situation changes in the future.
Don’t put yourself at risk
Ms Turner cautions that while it is lovely that many people want to give their children a helping hand, especially as it becomes increasingly difficult for young Australians to enter the property market, it’s vital that you make your financial security a priority.
“Let’s say that you buy a property for your children, and then you really need access to money at some point and that’s the only other asset that you’ve got. What do you do? Do you sell it? You can’t sell the laundry, so it’s not very liquid and it might not support you as well as an alternative investment might in that situation.
“We can absolutely plan for the children, but let’s make sure you’re not disadvantaging yourself along the way.
That’s where a balanced strategy that includes more liquid assets, such as an index managed fund, education bond or investment bond, can be beneficial, as they achieve the purpose of assisting your child while offering the flexibility to use it for other means if you need to dip in to it.
“We love our children, but I’ve seen clients killing themselves to protect what they’ve built for their children, whether it’s sending them to private school when they can’t afford it anymore, or doing everything they can to pay a mortgage on a property that, in their eyes, is their child’s property.
“And it’s really sad because it constricts and limits all the choices they could be making.”
Instead, Ms Turner stresses the importance of “finding a solution that keeps you afloat, so you’re able to adapt and reposition, and be better off for the longer term so that you’re actually able to give to your children in the future.”