Get them to nominate a savings goal.
In the early years it might be for a bike. In later years it may be for a car, or even for a horse! If their investments grow enough, the goal may change to the deposit for a home.
Let them choose, and watch their enthusiasm grow as they approach their savings targets.
As important as the money itself, good financial habits will put your children or grandchildren in good stead for life.
And they have time on their side. Over time, the amazing power of compound interest has the ability to transform their lives.
And the more involved they are, the better.
Make a day of it, take them down to the bank and set up accounts in their name.
- Most banks offer special interest rates for children’s accounts, so check with your bank or shop around.
- Offer to match them dollar for dollar, so if they save pocket money and put it in the bank — and leave it there — you’re offering to double their money.
- Review their account with them every year, emphasizing how their savings are growing and how the bank is paying them to save as well.
What about tax? Does your child or grandchild need a Tax File Number?
- Children under 16 do not need a Tax File Number, but they will need to provide their date of birth to the bank to avoid tax being withheld.
- The first $416 each year of an under-16’s interest income is tax free, but above that level the Australian Taxation Office assumes parents are trying to reduce their own tax. They charge 66% tax for every dollar of interest earned from $417 to $1,307, so if your child earns $1,307 they will pay the same amount of tax as if the rate were 45% for the whole amount (without a tax free component). Above $1,307 per annum, the rate is 45%.
- With current interest rates making it difficult to earn more than 3%, your child could have over $10,000 in savings before reaching the threshold.
If you’re in the position to help your child accumulate more than $10,000 and want to encourage a long term focus, then think about them investing in shares which pay a fully franked dividend.
Here’s an idea of how that might work out:
Amount invested $10,000
Annual Dividends at 5% $500
Tax at 45% ($225)
Imputation credit $150
Income after tax $425
With dividends around 5% or more on offer, even after paying 45% tax, the child earns 4.25% — a rate hard to better in a bank deposit.
And, over time the shares are likely to appreciate in value, an additional return which is totally tax free unless and until the child sells.
Of course, share investments are risky. Sometimes they drop in value, especially in the short term. If you are considering this route, talk to a financial adviser.
What are your thoughts?
Do you think it’s a good idea to teach your children healthy financial habits? Have we left anything out? Is there anything else you’d like to know about day to day money management?
Join the conversation — leave a comment below and let us know what you’re thoughts are.
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