Hawthorn Financial Planning

Saving for your child's future

As every parent knows (even before they become one), raising a child isn’t cheap. And those expenses don’t necessarily stop once they reach 18. Parents often hope to help their adult children with significant financial milestones in life too. We look at some of the main expenses for parents, how you can start saving for your child’s future and the different ways to go about it.

What do you need to save for?

Education

Probably the biggest single expense parents think about is education. In 2019, one third of students were attending an independent school according to the ABSⁱ. And with the national metropolitan average being $298,689ⁱⁱ for a private school education, it can pay to start planning early.

Weddings

Granted, not everyone will get married. But with the average cost of a wedding sitting at $36,000ⁱⁱⁱ, it’s no small expense. Couples might find themselves having to choose between paying for a wedding or saving for a house deposit, so a monetary contribution from the parents is often gratefully received.

House deposit

Helping adult children with a down payment on their first home is something 32% of parents are doing, a 2020 report from Mozo revealed. And they’re gifting an average of $73,522^iv. It could be something to consider when saving for your child’s future.

Unexpected costs

Life is not always plain sailing. Parents can find themselves helping grown-up children with unforeseen medical bills, periods of unemployment, meeting mortgage payments or dealing with the financial aftermath of a divorce or separation. Putting money aside for unplanned costs can mean you don’t have to dip into your savings or end up working for longer.

When should I start saving for my child’s future?

In most cases, the earlier the better. The sooner you start planning for future costs, the more time you have to save, and potentially benefit from things like compound interest – where interest is paid in regular intervals, building on top of earlier interest paid.

Once you’ve worked out how much you need to save and by when, the next step is to understand your current position. You can use AMP’s handy budget planner calculator^v to work out how much you can afford to save towards your financial goal.

What’s a good way to save money for my child’s future?

It depends on your financial situation, how long you have to save or invest, the level of risk you’re comfortable with and if you want to have the option of being able to access your savings at any time. Here are some options you could consider. When weighing up what’s right for you, remember to take into account all fees, charges and costs.

Savings accounts

For time-poor first parents, a regular or high-interest savings account could be a good place to start. Set up regular, automatic payments and keep it separate from your other current or savings accounts, so it doesn’t get accidentally used for something else. Then when you’re ready to do some research, you can think about another option for those savings.

Things to consider

Generally, you can access the money whenever you need.
There may be minimum or maximum deposit and withdrawal limits.
Low-interest rates can equal low returns.

Term deposits

This option offers guaranteed interest rates, provided you save your money for a set period. With a term deposit, you won’t be able to access the money ahead of time without incurring a fee, so if you think you’ll be tempted to dip into the savings at any time, it’s one to reconsider.

Things to consider

Your money will be locked away for an agreed period.
There may be minimum or maximum deposit limits.
It’s likely you’ll have to pay a fee if you want to access the money sooner.
Low-interest rates can equal low returns.

Growth or investment bonds

Depending on your financial situation, a growth or investment bond could be a tax-effective way to save for your child’s future. They let you invest on behalf of a child (or a grandchild). Ownership of the bond is then automatically transferred to the child at a date in the future, set by you.

Things to consider

Your money will be locked away for an agreed period, usually a minimum of 10 years.
There may be minimum or maximum deposit limits.
You’ll need to think about tax implications.
The expected rate of return.

Education saving plans

Some providers offer savings plans specifically designed for education. There might be potential tax benefits, and they often have features designed to maximise education savings depending on which stage of schooling you’re saving for.

Things to consider

Depending on the plan, your money could be locked away for an agreed period.
There may be minimum or maximum deposit limits.
You may need to pay a fee to access the money early.
There could be tax implications.
The expected rate of return.

Family trust

A family trust may be a suitable way to save for your child’s future. How the tax benefits may compare to other options depends on the ages, taxable income and number of family members in the trust. Generally, you’ll need a financial adviser or accountant to help you set it up.

Things to consider

There can be significant costs to establish a family trust.
There are strict guidelines and rules set out by the ATO.
Tax treatments are complicated and will require the help of an accountant or financial adviser.

If you’re a parent who wants to save for your child’s future, we can help you with an appropriate approach to provide for their future needs.