Mary Holm: Planning ahead to fund kids' uni life

Saving now can protect children from crippling student loans. Photo / Getty Images

COMMENT:

We are trying to work out the best way to save a tertiary fund for our children so they do not finish their studies with crippling loans. We have three children aged between eight and 13, a total balance to date of about $10,000 and we have just increased the monthly fund payment to $300.

Do you have any thoughts how we can better manage this rather than just than just using an ASB savings account?

I hope your children appreciate what you're doing — or will when they're at uni.

One option — which would usually earn more interest than you're currently getting — would be to use bank term deposits.

You have a pretty good idea of when you will want access to portions of the money, so you could plan term deposit maturities around that.

But that doesn't work well with your monthly deposits, and withdrawals are inflexible.

So a better idea is a non-KiwiSaver fund. You can set up regular deposits and take money out as and when you need it.

How risky should that fund be? You'll probably start withdrawing money for your oldest child in four or five years. And I'm assuming you are fairly conservative with money, given that you're currently using a savings account.

So the money for the first year or two for that child should probably be in a lower-risk conservative fund or extra-low-risk defensive fund.

However, given that it will be, say, six years before your middle child needs money, and nine for the youngest child, I suggest you put the bulk of your savings in a balanced fund.

That will invest roughly half in bonds and cash and half in riskier investments like shares and commercial property — which means your balance will sometimes fall in market downturns.

But usually it won't fall far, because the bonds and cash will balance things out, and it will always recover.

Could you cope with that? I hope so because, on average, your returns will be higher than in a low-risk fund. The kids will end up with more.

As the years go by, gradually move money from the balanced fund into the lower-risk fund, so that it's sitting there quietly for a few years before it's withdrawn.

All too scary? If a downturn would really worry you, just put the lot into a lower-risk fund.

If it's a conservative fund, most of the time it should still earn noticeably more than bank savings accounts. And even a defensive fund will probably, on average, beat a savings account.

How do you find a fund? Even though we're talking about non-KiwiSaver funds, use the KiwiSaver Fund Finder on sorted.org.nz. Click on Compare Funds, and check out all the balanced, conservative and defensive funds.

I suggest you choose a fund with low fees.

Then go to that provider's website — or call or email it — and see if it also offers similar non-KiwiSaver funds.

Most do. The fees tend to be a bit higher, though, so check that they are not too much higher.

Once all that is set up, you might want to start thinking about how you're going to divide up the money among the children.

One plan would be to give your oldest child a third of the balance when she or he starts at uni, give the middle child half when she or he starts, and the rest goes to the youngest.
But that might seem unfair.

While inflation will push up fees and expenses, compounding interest on your savings should take care of that.

So, if you keep contributing $300 a month, each successive child will get more.

Perhaps, after the first one starts studying, put $200 a month into the savings fund and give $100 a month to that child. And when the second one starts, put just $100 a month in the savings and $100 to each of the two students.

Even then, there will be possible cries of "unfair" What do you do if:
• One wants to do a much more expensive course? Perhaps giving everyone an agreed fraction of their tuition costs would be fairer?
• One is doing a course in another city, so they can't live at home?
• One child fails some courses? Do you fund a repeat attempt? Is the failure their fault, or are they just not as bright?
• One doesn't want to do tertiary study, but instead do an apprenticeship, or start a business, or become an artist or novelist?

There are no right or wrong answers to these questions, but don't give up.

Think about the options, and discuss them with the children. It would be good to get some agreement before the oldest one starts uni.

I suggest you put the "rules" in writing, and get everyone to sign that they think it's fair.

That might seem silly, but I've seen people take to their graves a story, tinged with bitterness, about how their parents treated their siblings better than them.

There's another issue here — although not one you have to worry about.

In last week's column we talked about whether it's fair for someone to get an interest-free student loan they don't need and then save that money in KiwiSaver or elsewhere.

Many people would say that's not ethical. But is it fair to chide people who do that when their fellow students — lucky enough to come from better off homes — are being funded by their parents?

Surprise addition

I have recently found that I have a 13-year-old child in another country. I would like to set up a fund that I can make contributions to. Can you let me know the best way.

Wow! That's quite a revelation for you. And some people might respond by saying, "If nobody told me about this for all these years, I'm not obliged to help out the child". But it's hardly the child's fault. I like your attitude.

Hopefully, at some point you'll get the chance to develop a relationship with your son or daughter.

Being able to let him or her know you have some money for them has to be a good starting point.

You don't say where the child is. But regardless, I think it's best to save the money in New Zealand, under your name.

It seems that you're not in close contact with the mother, so you probably want to keep control of the funds until the time the child spends it — perhaps on tertiary studies or buying a home, or even travelling to New Zealand to meet Dad.

You might want to send account statements to the child, though, so he or she is aware the money is there.

I suggest you read the previous Q&A and set up a similar account in a non-KiwiSaver fund.

If you expect to withdraw the money within the next three years, go for a conservative fund — or a defensive fund if you are really risk-averse.

But if you have three to eight years in mind, a balanced fund would be good.

Investing for grandkids

I am a grandfather of five-year-old and two-year-old granddaughters. I am seeking advice as to what might be a good way to invest, say, $1000 each for the girls so that they can benefit from this small investment when they reach 21 years of age. Thank you for any advice you may be able to give.

See the above two Q&As. You have a longer time horizon, though — 16 and 19 years.

That means it would be a good idea to put the money into a growth fund, in which 63 to 90 per cent of the investments are in shares and property, or an aggressive fund, with 90 to 100 per cent in those riskier assets.

You'll have to cope with some big ups and downs over the years, but will almost certainly end up with more than in a lower-risk fund.

It's the same story as above — if that worries you too much, start out in a lower-risk fund.

What we don't want is for you to panic when the balances drop and move the money then.

That's how people lose in a big way, turning losses on paper into real losses.

If you're brave enough to go with a higher-risk fund, you should move the money to a lower-risk one when you get within, say, three years of the girl spending it.

Should the money be in your name or theirs?

Even though the accounts will be taxed at a higher rate, I suggest that you keep the money in your name, like our previous correspondent, but for a somewhat different reason.

While I'm sure the little girls are lovely, you never know what they might be like at 20, when they withdraw the money to blow on travel, a disaster of a car, or something else that wasn't quite what you had in mind.

In the first Q&A, we discussed fairness between siblings. But that shouldn't be a big problem for you, as you're not planning regular contributions to the savings.

If you give the first one half when she reaches 21, the younger girl will get more on her 21st birthday, because the investment has run for longer. But she'll need a bit more because of inflation, so it's not a big deal.

There's another possible fairness issue, though. Is there a chance that more grandchildren might come along? Or step grandchildren? Consider setting up a plan for that. You might even want to allow for it in your will, in case a child is born or joins the family after you die.

That might seem over the top, like my suggestion above about all the kids signing an agreement.

But you don't want kids resenting the fact that their siblings or cousins were favoured by grandpa.

More next week on financially supporting kids.

Averaging works

I see the anti-dollar cost averaging police got to you, Mary, in your last column. They are quite militant people.

I came up against a couple of them on a forum discussion one time. They tend to like to selectively slice and dice the stats to argue their case.

Next time I'm just going to post a link to your last column rather than try to convince them ad infinitum that for many people dollar cost averaging (DCA) is the way to go.

I will never put all my money into an investment in one go after having done that in 2001 with $30,000 I put into a managed fund on a high day.

Even though the money grew eventually, it took more than 10 years to see any positive return.

Also, I'm pretty sure it didn't yield as high a return as if I had dollar cost averaged it in over several months, thus avoiding that high point.

I'm glad you explained the psychological effects of avoiding a loss when making an investment, which is a very relevant factor.

Each to their own, I say, when it comes to DCA. I'll go the DCA way.

Thanks for your encouraging letter. I think we ignore the psychological aspect of investing at our peril. We're all affected by our feelings, whether or not we acknowledge it.

By the way, it's highly unusual to see an investment in a managed fund take more than 10 years to grow. Tough luck.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.