How to invest for your kids’ education through the sharemarket

Photo of Tania Smyth, Morgans (pictured) and Rebecca Pritchard, Wealth Enhancers By Tania Smyth, Morgans (pictured) and Rebecca Pritchard, Wealth Enhancers

min read

A good investment now will mean greater choice – and less financial stress – later.

When you have that gorgeous baby in your arms, your child’s education seems to be something you can think about later. But we all want the very best for our children and know a good education can be expensive.

Some early financial planning can help ease the burden on the family budget. As with any savings and investment plan, the earlier you start, the more flexibility and choice you will have later on.

There are many investment options to choose from when investing for your child’s education. The beauty of investing in the sharemarket is that it provides flexibility and choice, and you can plough back any dividends or income you receive and let the power of compounding work its magic.

Here are a couple of investment types to consider:

Listed Australian shares

Shares have proven to be one of the best-performing investments over the longer term, that is, five or more years, which is the typical timeframe you should consider when funding for education.

Not only do shares provide the potential for capital growth, but can also provide the potential for fully franked dividends. These are handy as they provide an imputation credit, which is a rebate to you on tax already paid by the company.

Exchange-traded products and managed funds

There are hundreds of options available on ASX that enable you to invest in a diversified fund in a single transaction.  These range from professionally managed investments such as Listed Investment Companies (LICs), Listed Investment Trusts (LITs), Australian Real Estate Investment Trusts (A-REITs) and exchange-traded managed funds, through to low-cost funds that track an index, known as Exchange Traded Funds (ETFs).

Apart from the instant diversification that can be achieved, particularly if you are starting with a smaller investment amount, the growth in these products has extended to allow you to invest in international shares and other asset classes, including infrastructure, fixed income and commodities. They can all be bought on ASX through a financial adviser or stockbroker.

Self-Funding Instalment Warrants (SFIs)

These enable investors to borrow to invest though the purchase of shares in two payments. This allows you to benefit from the growth and income associated with the underlying shares without paying for them in full upfront. The first payment is the price you pay for the SFI on ASX, typically around 50 per cent of the underlying share price.

The second payment, known as the Final Instalment, is paid at the predetermined maturity date.  Any dividends received are used to reduce the Final Instalment while the investment is held. The interest cost associated with this type of borrowing, known as a limited recourse loan, is added to the Final Instalment. If the dividends are higher than the interest cost, the loan will reduce over time, possibly being paid in full before the maturity date.

These types of warrants are a viable option for education savings as they allow you to buy a larger parcel of shares today and there are no further payments required from you throughout the term, which is different from other forms of borrowing to invest. Note that borrowing to invest not only has the potential to enhance returns, but can also lead to magnified losses.

No matter which investment option you choose, all investments need regular monitoring to make the most of your savings.  Seek advice from your taxation and financial adviser to discuss an appropriate education savings strategy that suits your family’s situation.

Set your values and goals
By Rebecca Pritchard, Wealth Enhancers

Setting your children up for long-term success is one of the most exciting things about being financially free. We want to create wealth so our families can enjoy a richer life.

No matter what position you're starting from, my advice is the same – start with your goals and values. If you have clarity over the education goals for your children, fantastic.

If not, spend time to visualise what this looks like for your child and your family. How much would you need to reach this goal? Over what period? Is this likely to change? How many children will this be for?

Your goals and values will be the cornerstone of the entire conversation and the ideal framework to help you make decisions going forward.

You can use the timeframe to select an appropriate tool to reach these goals. If it’s imminent (less than three years), cash is going to be your best friend. Beyond three year, perhaps an equity portfolio will work well to give you exposure to growth but maintain liquidity.

If you have 10 years up your sleeve, an insurance bond might be the answer. The team at Wealth Enhancers works closely with Generation Life (GenLife) for this exact purpose. We largely use LifeBuilder bonds over ChildBuilder bonds (which can be created in your child’s name) to allow parents to have the flexibility to change the purpose of the investment over time.

However, both will lead to a strong outcome to have funds invested efficiently, in a tax-effective structure, out of reach and ready to go when you need it. GenLife recently reduced the initial contribution to $1,000, making them very accessible to families and may be a perfect place to put money received by the kids as presents.

Parents (or future parents) with time on their side, need to shift their mindset away from piggy banks and cash if they want to reach their goals.

Education is becoming more expensive, and more important in all our lives. If you can plan for this as soon as possible, using a structure such as a bond will put you in the best position to reach your goal. Saving cash over 10 years will guarantee you progress slowly and could affect  your choice of school.

Start early and start with what you have. Even if you don’t yet have the kids, it’s never too early.

About the author

Tania Smyth is a broker at Morgans, a leading full-service retail stockbroking firm.

Rebecca Pritchard is a Gladiator at Wealth Enhancers, an award-winning Gen Y financial advisory firm.

From ASX

First-time Investors is a great place to start to learn about investing basics.

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