Six Steps to Financial Security for Your Children

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By Charize Beukes*

It is very easy for modern parents to worry about the uncertain future of their children, especially their financial future. It’s natural because there are so many external influences that you can’t control.

Charize Beukes

However, there is one area where you can help them and give them more certainty in their future. And it’s by following a few simple steps that will give them a stronger financial footing from which to go out into the world.

Step 1: Teach them financial fitness

Start by developing healthy financial habits in your children so that they understand the value of money from an early age.

A piggy bank in their toddlers can be replaced with a savings account which they use to save their allowance or the cash deposits they receive instead of material gifts.

It’s only by talking to them and exposing them to how money works that they really learn the benefits of saving for something they want. In the process, they learn independence and financial responsibility.

If taught well, these are lessons they will pick up as adults and apply to life’s bigger financial decisions. And remember, children copy what they see. It is therefore your responsibility to set a good example.

Step 2: Save for their education

Their college education is probably the last thing on your mind when your newborn is lying on your lap, cooing with delight.

However, there is no time to waste. Giving your children the best chance of success means getting them into the best schools and higher education you can afford. And the best way to afford the best is to start saving from day one.

It is estimated that a year in a private primary school will increase from around R100,000 in 2020 to over R150,000 in 2025 and nearly R240,000 by 2030. Five years later you will see over 360 ​rand, 000.

Private secondary school costs are expected to rise from R160,000 in 2020 to R250,000 (2025), then R380 (2030) and nearly R600,000 by 2035. Average annual university costs look cheap in comparison, rising from around R70,000 in 2020 to R107,000 (2025) then R165,000 (2030) and up to R255,000 by 2035.

By investing as little as R1,000 per month from the birth of your child, a nominal annual growth of 10% will provide you with enough to pay for his education.

Step 3: Prepare for the worst

Your best-laid plans will be for naught if you haven’t prepared for the worst.

And the best way to do that is to look after your family’s well-being by providing for them when you die.

Your first line of defense is a life insurance policy that will support your family in your absence. These life contracts are fairly standard and easy to set up, but it’s always worth talking to a trusted financial advisor. Especially because the benefits of your life insurance policy must be distributed according to your will.

Your last will and testament are key to passing on your assets and responsibilities to your family. We have specialist knowledge in this area as we constantly work with investors to ensure that their assets are optimally protected, whilst being available to care for loved ones.

Step 4: Use a tax-free account

Besides saving for specific goals such as education, it seems foolish not to use the tax-free benefits offered by the Treasury’s tax-free savings framework.

This saves you R36,000 per year up to a lifetime limit of R500,000 in non-taxable instruments. The big advantage is that your child will not pay any tax on dividends, interest or capital gains earned during the investment period.

The graph below, based on certain assumptions, shows that if you keep the money invested until your child turns 30, the value of the tax-free investment will be 42% greater than the investment taxable equivalent. At retirement age (65), this difference doubles the value of the same taxable investment.

This shows that resisting the temptation to divest from the fund prematurely can lead to significant returns that give your children a head start so they can start a business, buy a first home, or invest more for retirement.

Source: Coronation

Assumptions: tax rate of 45%, CPI + growth of 6% per annum, annual contribution of R36,000 up to a lifetime cap of R500,000.

Step 5: Take care of number one

The best way to ease the burden of your children in retirement is to prepare yourself sufficiently for your own financial well-being.

So, engage with a financial advisor who can help you meet your responsibilities to your family by taking care of your future. Failure to do so could place a huge financial burden on your 30-somethings who themselves are still trying to build their lives.

Step 6: Get professional advice

Your responsibility as a parent is to take care of your children. Not being an expert on the financial markets and how they will perform over the next 18 years as your newborn grows up.

The easiest way to navigate this process is to speak with a licensed financial advisor who can guide you on how to achieve your goals. You will be rewarded time and time again by relying on the expertise of financial advisors and the insights we gain from highly experienced fund and wealth managers.

  • Charize Beukes is Assistant Financial Planner at Brenthurst Wealth Pretoria. [email protected].

Wealth Brenthurst

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