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How to invest for your children's future

AREN'T you such a nice person to think about the financial future of your children? 
We take the view that the best investment for your children is to ensure you have a secure financial future.

If you are financially secure, it means you're happy and able to provide a stress-free, loving environment in which your children can thrive. It sounds selfish but you are the most important factor in your children's development, far more vital than having a nest egg.

However, if you have yourself covered, giving your kids a financial head start can be a terrific idea.

Back in the old days it was the endowment insurance policy. Parents would answer the knock on the door from the life insurance salesman who would extol the virtues of how a few dollars a week contributed to the policy would set up your child for life when it matured on their 21st birthday.

Naturally you would be constantly reminded of this little nest egg while growing up and, as the magic day approached, your thoughts would wander to what you would spend this massive amount of money on - a new car, a house maybe?

It wasn't until the cheque arrived that you became aware of the poor investment returns and high fees involved in this type of investment.

Thankfully, there are a lot more investment options for parents today, from savings accounts to education and managed funds.

The easiest way is to simply open an online savings account that pays a decent interest rate and has low fees. The compounding interest will add to the balance quickly. Talk to the institution about whether an account can be opened in a child's name. Here are examples of how powerful compounding can be in building a nest egg for a child:

Invest $100 a month into a savings account paying 7 per cent and at age 21 your child will receive $84,000 but you've outlayed $25,300 over the term.

Deposit a one-off $5000 (maybe a tax refund or unexpected windfall), simply leave it in an account earning 7 per cent and the balance at 21 will be $21,653.

Deposit that $5000 into a 50/50 geared fund earning 5 per cent growth and 4 per cent income and the balance at 21 will be $60,000.

Whatever you do, it's critical to get advice and check the tax situation. Depending on how it's set up, you may have to pay tax at your marginal rate on the interest. If the account is in your child's name, be aware that if interest is above $416 a year, a 60 per cent tax rate will apply.The reason this tax rate is so harsh is to stop parents hiving off part of their assets to their children to cut their own tax.

Many have gone down the managed fund route, particularly when a regular savings plan is attached.

A managed fund is where thousands of investors pool their contributions into a fund which is then managed by professional investment experts who do all the research and make all the investment decisions. While many have a minimum investment of $1000, others allow investors to then contribute a small amount on a regular basis.

The attraction of these savings schemes is that they provide a regular, disciplined way to build wealth and have the benefit of professionals making the decisions.

Another option is to invest in quality shares. It's an interesting idea because the fundamental basis for good share investing is to choose quality shares and give them time to work and make a return.

We rang a few stockbrokers for their thoughts and selections on shares for the long term. Shares which had a good future and, over time, would produce a solid return. The results were interesting.

They were suggesting look at big, strong industrial shares which pay a dividend and have a proven track record.

The big four banks have proved to be strong performers over recent years and, because they've been around a long time, are likely to be around for a while to come.

Would you believe, over any 10-year period, investing in bank shares has been a better option than investing in any product a bank offers customers. They have a history of strong capital growth and income returns.

Other good dividend-paying shares recommended were Telstra (it's up 40 per cent this year), Coca-Cola Amatil, Woolworths, Wesfarmers and Westfield Group.

Make sure you talk to a stockbroker or financial adviser about a portfolio of shares that is right for your children and remember investing in shares can be volatile.

There are also a few education and "scholarship" funds but choose wisely as a problem with some of these are their inflexibility.

If your child doesn't end up going to university, you get back what you've invested at a poor return.

* Start young
* Pay pocket money
* Encourage saving
* Open a bank account
* Inspire teenagers to invest


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