Investing for your children

Johannesburg - Having such exceptionally gifted, multifaceted and multitalented children (or grandchildren) comes at a price.

Let's make it about R50 000 a year in university and accommodation fees? Much more if you want them in a top private school? Just honing their skills in music, maths or macramé could leave you thousands out of pocket.

To realise your offspring's huge potential will involve money - which few of us will have available at the drop of a hat.

The earlier you start putting some cash away the better. But where?

1. Savings accounts.

You can open an account in your child's name, although it might be a bit more complex than you think. The Financial Intelligence Centre Act requires financial institutions to verify your details thoroughly to prevent money laundering and identify theft.

You probably will need a legal guardian affidavit, which has to be signed before a Commissioner of Oath, as well as a copy of your ID, utility bill (as proof as address), an affidavit that you child lives with you and the original birth certificate.

Pros:

There is little risk involved. Your money won't disappear. If you use a monthly debit order, it will force you to stay invested.

Cons:

- Little risk, little reward. With interest rates coming down, you will earn less on your savings. On R25 000 in a savings account or fixed and notice deposit account, you will typically earn less than 10% a year - which is below the current rate of inflation. This means your money is actually losing value. And that's without considering the banking fees.

Shop around for the lowest banking costs and highest interest rates. Look beyond the usual suspects - smaller, non-traditional outfits, like Pick n Pay Go Banking and Capitec, may offer a better deal.

2. Shares

In the long run, buying shares in listed companies will grow your money best - beating savings accounts and property. In the short run - like last year, when the SA stock exchange lost almost a quarter of its value, it could break you heart.

Traditionally, though, the market recovers within a couple of years - and you should have time on your side.

Pros: Not only should the value of the share grow, but most of the large companies also pay out dividends twice a year. (A dividend is a share of the profit.)

Cons: The problem is choosing the right share. Not all shares grow and blossom - some companies even go bust.

- There is a cost involved. Brokers will charge you every time you buy or sell shares, and usually you will have to pay a monthly account administration fee.

3. Unit trusts

Unit trusts (often called "funds" or "collective investments") pool many investors' money together to buy shares. You don't own the shares, but are allocated units in the fund. You can open a unit trust account in your child's name.

Pros: Because the costs are divided up among all of you, it's usually cheaper than buying individual shares.

- The biggest advantage is the fact that your money is spread out over a number of shares, instead of putting all your money on one share.

You can invest through a monthly debit order.

Cons:

- Although usually cheaper than shares, the costs could be end up being a factor. You will pay a percentage of your investment every year.

The performance of unit trusts varies, and there is little research to prove that fund managers, who manage investors' money, consistently beat "passive" investments.

Where fund managers decide which shares to invest in - and charge you a lot for their expertise - while passive investments simply track an index of shares. There are "passive" unit trusts too, usually cheaper than "actively" managed funds.

4. Exchange-traded funds

These funds are passive investments - they aim to mirror a specific index on the bourse. The Satrix 40 fund, for example, will only invest in the forty biggest shares of the JSE. Satrix, which is an initiative of the JSE, is the best known in SA.

Pros: This is probably one of the cheapest way to invest in shares. You will also earn the dividends paid out on the shares. You can invest a lump sum or through a debit order.

Cons: Having your investments track a specific index is not such a wonderful thing if that index falls apart.

5. Life insurance

It may sound unsexy, but a life assurance policy is the one investment you must have.

Before you do anything else, make sure your children are provided for in case something happens to you. Not only should it cover all your debts (including your house), but also provide for their education.

6. Trusts

This isn't a way to grow your money really, more a (sometimes) tax efficient way to transfer big amounts or even properties to your children.

Transferring your assets to a trust will reduce the size of your estate, which means less tax. Your child, who falls in a lower income tax bracket, can be registered as a taxpayer.

You determine the trust rules: when the child will get access to the assets.

If you are unsure of how to start saving for your children - as well as about your own financial health and prospects - consider talking to an accredited financial advisor.

- Fin24.com