Frances Cook: Why KiwiSaver for your kids could be a mistake

Involving children in an investment journey means they’re ready to continue managing their money and making smart decisions when they fly the nest.

One of the questions that’s constantly sent my way is “how can I save for my kids? Should I open a savings account for them? Or is KiwiSaver better?”

It’s a question with beautiful intentions – to give their children a headstart on adult life, whether that’s by paying for a university course, a first home, or to start a business.

But I don’t think either a savings account or a KiwiSaver fits the bill. There’s a numbers reason and a money psychology reason for why.

A savings account feels the safest but in the long term is a risky choice for your money.

There are specific cases that a savings account is great for – emergency money, or money that you intend to use in the next one or two years.

But over a longer period of time, inflation bugs creep in and start nibbling holes in your nest egg.

A savings account right now earns around 3 per cent interest, possibly up to 5 per cent if you snag a good deal at a specialist bank.

Meanwhile, the latest inflation figures are at 5.6 per cent. This means that your money is becoming worth less over time and even a higher-interest savings account is going backwards.

For things such as your emergency savings, or money you’ll need to use soon, that savings account is fine.

Not making as much is a necessary sacrifice in order to make sure you have money safe on hand for dealing with life’s curveballs. It’s not going up but it’s not going down either.

But what about for money that you’re trying to build up over 18 years of childhood in order to give the sprogs the best start in life? That money could be working harder so you can give them an even bigger headstart.

Let’s look at the numbers to prove the point. A savings account over a period of years might give an average of 2 per cent interest.

So, say you can put aside $20 a week for your child’s future nest egg. Over 18 years, a compound interest calculator shows us you’ll have $20,555.82.

Now that’s entirely respectable but you put in $17,280 of it. You could be getting more reward for your money while making the exact same amount of effort.

So, what happens if you put that same $20 a week into the share market?

Over the past 20 years, the NZX50 has given an average of roughly 10 per cent growth per year.

But take a couple of percentage points off that to make it fair, accounting for fees, taxes, and inflation.

So you run it through a compound interest calculator at about 7 per cent per year.

In this scenario, you now have $32,639.07. An extra $12,000, for no extra hard work from you.

You only put in $17,280 of that. The rest is the share market doing the hard yards while you get to keep enjoying your weekends.

So if you want to start investing, how about a growth KiwiSaver account? After all, that’s invested into shares.

If you really need an easy option KiwiSaver can work but it has some serious drawbacks, which means it’s not my first choice.

Children don’t get the perks that working adults do, such as $521.43 per year from the government, or the 3 per cent employer contribution. Those only kick in once you turn 18.

The money is also locked away and unable to be withdrawn until retirement, or a first-home deposit.

What if your child wants to start a business? Or take part of it to fund a gap year? Experiencing the world might be something you’re perfectly happy to help fund, but KiwiSaver won’t allow you to do that.

Instead, I’m a fan of starting your own investing fund and working on it together. This addresses the money and the mindset parts of the equation.

Something like a global index fund means your money is spread across some of the most successful companies in the world.

Investing experts love to talk about diversification, which just means don’t put all your eggs in one basket. A global index fund means hundreds of companies, across hundreds of different industries, across different countries.

It’s not foolproof, but it’s pretty close.

Being able to involve them in this and invest with them as they get older is also a key part of the strategy.

Ever heard the horrible stats about how many lottery winners end up with less money than they started with? Well, the same problem applies to inheritances or any windfall money that comes out of the blue.

Money that we don’t feel as though we’ve earned ourselves does something funny to our brains and we almost always blow it.

But you can get around that by involving your children in the journey, so they feel ownership of the nest egg and also learn by doing.

By putting money into the share market together, seeing how it works and experiencing the normal ups and downs, they’re ready to continue managing their money and hopefully making smart decisions when they fly the nest.

So my No 1 advice to any parent wanting to help set their kids up financially is to start with themselves. Improve your own knowledge, so that you’re comfortable investing in the share market.

Then involve your kids in that journey, so they have the opportunity for a money head start and a knowledge head start.

That’s the biggest gift you can give.

• Frances Cook is qualified as a financial adviser and has published two best-selling books on personal finance. She is best known for hosting the Cooking the Books podcast and is a regular commentator and speaker on financial issues.