Investing for Kids

​As a parent, you’ll want the best for your child or children. Setting them up for financial success isn’t easy, and many parents have asked MoneyHub “how can I invest in my child or grandchild’s future?” This guide outlines and highlights some ideas and investing opportunities.

Updated 13 July 2020

Disclaimer: Our investing for kids guide is journalistic and nature and does not constitute financial advice. Any company, platform or service listed in this website is included as an example only. Never invest more than you can afford to lose. Investing for kids is generally a long-term strategy and process, with regular contributions. If you’re unsure about anything, either seek financial advice, and/or don’t invest. An investment you don’t understand is (generally) not a good investment.

Our guide covers:

• Investing for kids – how much is enough, what should the focus be, and when should I start?
• Five Popular Investing Products for Kids
• ​​Three Must-Know Facts and Considerations when it comes to Investing for Kids

Know this: You can never invest for children too early. The benefits of compound interest means whatever you invest will directly grow your child’s wealth today, and the interest they earn on their investment will earn its own interest after that. Compound interest is effectively a snowball of savings - the balance will grow the fastest when you make regular contributions.

​Why do most parents want to invest on behalf of their kids?

As kids are expensive although more so at different life stages. Parents who decide to invest for their children do so for three main reasons:

1. To help pay for university or other tertiary education, and/or
2. To contribute towards a first home deposit, and/or
3. To finance extra circular activities, a student exchange, a car and/or other big-ticket items

​Debt can be expensive, and while the student loan scheme and first-home interest rates are low, things can change, and money is always hard to accumulate when your children are young as their working opportunities are limited and lowly paid.

Important: Ensure you are financially secure before investing for your children. This means clearing all consumer debt (like credit cards), contributing to a retirement savings plan (i.e. KiwiSaver) and having a cash safety buffer of at least three months income. It’s unwise to start investing for a child at the expense of your own financial security. If you do, you are at risk of having to rely on your child or children to help you through retirement, which is not a situation you want to be in.

​Investing for kids – how much is enough, what should the focus be, and when should I start?

Everything is relative to the needs of your child. Investing $10 a week can accumulate $10,000 by the time a newborn turns 18 years of age, but for most parents, time is already ticking (and hindsight is a luxury). With household bills and living costs at record highs, it may be hard to find $10 or $20 a week to put aside for your children. However, committing to a regular contribution makes a significant difference in their lives later on.

​Investing for your child’s education expenses

With a 0% interest student loan scheme and free first-year fees, education is more affordable than it has been in the last twenty years. However, the situation today is no guarantee of the future, and successive governments may increase fees, change loan schemes or do both. We estimate the average tertiary study and living costs total around $40,000 for a three-year course if your child lives away from home. It’s a lot of money that can be funded through an existing investment and/or using the student loan scheme.

Our view: We believe the student loan system, in addition to a part-time job, is sufficient to finance tertiary study for most students. A student loan and/or allowance probably won’t be enough to finance living costs (unless your child lives at home), so having a cash buffer will avoid the reliance on interest-free overdrafts.

​Investing for your child’s first home deposit

In almost every corner of New Zealand, homes are expensive (relative to average income levels). A $900,000 home for two people in their late 20s earning a household income of $120,000 is still prohibitively expensive. Growing an investment to finance a home deposit will be of enormous benefit to any child when the time comes. The larger the deposit, the lower the interest rate (because the loan is less risky) and the lower the ongoing interest and repayment costs.

Our view: Parents are increasingly helping their children, known as the ‘bank of mum and dad’. Rather than risking your home as security, a one-off cash contribution for a deposit is low-risk and has long-term benefits. Coupled with the KiwiSaver first-home withdrawal and HomeStart grant, as well as your child’s savings, homeownership can be much more affordable. While MoneyHub isn’t obsessed about home ownership (as some other financial resources are), the right homes continue to be a long-term investment for life.

MoneyHub user Josh says:
“My wife and I gave both of our children $50,000 in cash each. My son bought a house for around $600,000 in Wellington, meaning this helped a lot with his deposit. He financed the repayments by getting two flatmates. I think without our money he would have had to settle for a home that wasn’t as attractive to renters, and this would have affected his repayments”.

Investing for your child’s retirement (using KiwiSaver)

With KiwiSaver available for under 18s (and many schemes offering free-fees), growing their retirement fund with voluntary contributions is very easy. Our KiwiSaver for Kids guide explains everything significant to consider about signing up. The benefits include that after the age of 18, all employers must contribute to their fund, further accelerating their retirement nest egg.

Our view: We don’t believe New Zealanders are saving enough via KiwiSaver, so the earlier a child starts, the higher the chance they’ll enjoy a healthier retirement. Best of all, the only way they can access their KiwiSaver balance is when they retire, for a home deposit or in extreme financial hardship.

Potentially suitable or relevant investment product(s): KiwiSaver is the most popular retirement scheme in New Zealand, and our favourite KiwiSaver funds can help you focus on what your child’s investing strategy is.

​Investing for your child’s future assets, expenses and experiences

Children go through a lot of important (and expensive) events, milestones and experiences in their late teens and 20s. This can range from the purchase of a car to saving for a post-university trip to helping out with setting up a flat. Whenever they need a big-ticket item, having an investment fund to draw from will help cover a portion of the costs. It avoids the need to borrow or arrange financing, cementing the view that saving is better than borrowing for most purchases.

Five Popular Investing Products for Kids

​Bank Accounts, Savings Accounts and Term Deposits (with high-interest rates)

• Investing in cash is often the most obvious investment choice for kids. Many banks offer above-market interest rates for kids to encourage them to become customers.
• Pros: It’s easy to make regular contributions to savings accounts, the interest rate paid is guaranteed, and children can understand and recognise that the closing balance equals the value of their investment.
• Cons: Interest rates are at all-time lows right now, meaning $1,000 will earn about $20 or $30 a year. Many (non-bank) companies advertise 6% p.a. or even 9% p.a. returns, but unless the investment is safe, you place your money at risk when it comes to repayment.
• More details: Best bank accounts for kids, top savings accounts and term deposits.

​KiwiSaver

• KiwiSaver is New Zealand’s largest savings scheme. Your child can choose from one of the hundreds of funds on offer, and contribute when they work and/or by making a voluntary payment.  
• Pros: It’s free to join, has long-term benefits for its members (by way of employer contributions starting when your child is 18 and over), first home grant and withdrawal opportunities, and many schemes have lower fees than managed funds offering similar investment strategies.
• Cons: You’ll need to decide what fund to invest in. Furthermore, your child can’t access the money unless they reach 65, buy a home or face extreme financial hardship. This means once they contribute a $1, it stays in the fund until it’s eligible to be withdrawn.
• More details: KiwiSaver for Kids and Our Favourite KiwiSaver Funds

​Exchange-Traded Funds

• Known as ETFs, these investment products are bought and sold on sharemarkets (such as the NZX or US markets. An ETF invests in many different companies depending on the investment strategy. There are dozens of ETFs available on the NZX (known as Smartshares, bought directly using a broker or via Sharesies or InvestNow) and hundreds of ETFs available on the US markets (bought from New Zealand using platforms such as Hatch or Stake).
• Pros: Many have ultra-low-cost management fees, offer unrivalled investment diversity and track established sharemarket indexes.
• Cons: You’ll need to decide what ETF to invest in, and if you purchase ETFs in US Dollars, the value of your investment will rise and fall depending on how strong (or weak) the New Zealand dollar is.
• More details: Hatch review, Stake review, Smartshares review and Shares vs ETFs.

​Individual Shares

• Buying shares in a company has traditionally been a popular way to build up an investment portfolio, but choosing the right company can be difficult. Despite the NZX50 always increasing, many companies struggle and see their share price sink – Sky TV, Air New Zealand and Pumpkin Patch (which went bankrupt) being examples.
• Pros: No management or holding cost; once you pay the brokerage fees, you own the share and can hold it free of charge until you decide to sell. Many have ultra-low-cost management fees, offer unrivalled investment diversity and track established sharemarket indexes.
• Cons: Little diversification – the performance of your investment will directly relate to how each company’s share price behaves. If you invest in something that goes from $2.50 to 50 cents, you’ll lose 80% of your money. The total investment value depends on what company’s shares you buy. It’s also hard to make regular contributions to share portfolios unless you use a low-cost platform such as Hatch or Sharesies.
• More details: Hatch review, Stake review, Smartshares review and Shares vs ETFs. ASB Securities review and Direct Broking review.

​Managed Funds

• A managed fund is an investment that pools your money together with other investors. The managed fund then buys shares, bonds and/or other securities; what they hold is known as an ‘investment portfolio’.
• Pros: Some funds offer unrivalled investment diversity, use experience managers or track established sharemarket indexes. Every managed fund aims to grow investments year on year.
• Cons: You’ll need to decide what managed fund to invest in, and whether that will be actively or passively managed. Some funds charge management fees as high as the returns they make, and there is a risk that your investment makes a negative return in times of market volatility.
• Know this: If you select a managed fund, you’re relying on the fund manager to make the investment decisions for you. Day to day, the value of the fund increases and falls so you’ll need to be comfortable seeing that.
• More details: Managed Funds guide, InvestNow review and Simplicity Investment Funds.

​Three Must-Know Facts and Considerations when it comes to Investing for Kids

1. Explain the purpose of the money you’re contributing

• ​There is no point giving your child access to a nest egg if you don’t explain what the reason is behind the sacrifices you’ve made contributions to it.
• It doesn’t matter if it’s $5,000 or $50,000, everything you invest on their behalf needs to have expectations set.
• We believe that what’s most important to children is what you teach them, not what you give (or leave) to them.
• If you transfer $10,000 to an 18-year-old without any explanation or expectation, you may be setting them up for a downfall similar to those faced by many first division lottery winners.

 
2. Explain the value of hard work and financial responsibility

• The more children understand the importance of being financially responsible, the better their relationship with money. There’s no ‘right’ way to handle money, but there are a lot of good habits kids can learn at a young age.
• If you position yourself as an on-demand ATM, your children won’t understand how money comes into existence. On the other hand, if you teach kids about compound interest and other must-knows, they learn the importance of saving and resisting temptation, which can avoid incurring bad debts later. 

3. Read the MoneyHub student-focused guides to money

• ​Our research team has published several popular resources – we suggested looking at Money In A Nutshell For Teenagers, Smart Money Tips For Kids and Student Money Tips to learn about saving, investing and understanding money in general.