Most parents or grandparents want to leave their children with a financial legacy, yet when it comes to retirement, they’re faced with the stark reality that they may not have enough money to meet their own retirement needs, let alone leave their children an inheritance.
The best way to leave a financial legacy is to teach your children how to manage their own money and help them start an investment that has time to grow.
The financially savvy gift
If you want to teach your child about budgeting and saving, open a bank account in their name. They can use it to save their pocket money and other family members can contribute rather than buying gifts. Help them to set a savings goal and to work out how much they will need to save to reach that goal.
A teenager can have their allowance paid into the bank account so that they can learn how to manage their money and expenses, such as airtime, clothes and toiletries.
The best account: Banks offer specific accounts for children and teenagers with low or no fees and higher interest rates for savings.
The gift of time
The best gift you can give your child is time because wealth is not created overnight – it takes time and that’s something your child still has. For example, if you invest R300 per month for your child and received an average return of 10% a year, within 18 years it would be worth R180 000, of which R115 000 is growth.
If an 18-year-old just left that money to grow at 10% a year, without even adding additional funds, after twenty years it would be worth around R1,3 million. By the time you retire, you’ll have left your child with a legacy that doesn’t affect your retirement plan.
The best account: As your child has a long investment time frame, they need to be investing in a unit trust fund that has exposure to the stock market. If you open a unit trust in your child’s name via a tax-free savings account, such as those offered by Stanlib, they won’t have to pay any tax, including capital gains tax, on the funds.
The share certificate
Many years ago, when share certificates were still paper based and not electronic, grandparents would buy shares in a well-known company for their grandchild when he or she was born. Over time these shares became valuable, not only because the share price had increased, but also because of the income generated by those shares through the dividends received.
For example, in 1970 Standard Bank listed at a price of 35c per share. A R100 gift invested in Standard Bank shares would be worth nearly R40 000 today – representing a growth of around 15% a year.
In addition to the growth in the value of the shares, the shares would have paid out dividends worth R14 582 over the period. That is a total return of R54 400 from just a R100 investment. This year alone those shares would have paid dividend income of R1 656.
The best account: Although you may not be able to hand your child an actual share certificate anymore, you can open an online stock broking account in your child’s name. Opt for an account with low monthly administration fees. |
