I get a lot of questions from grandparents wanting to know how to set their grandkids up.
Here’s how not to do it.
The Trust Fund Disaster
Our son died in 2006 leaving behind a one-year-old son and an insurance payment of $60,000. We put the money into a trust fund hoping to grow it into a legacy for our grandson. We invested with a financial firm who — after five years, fees, and the stock crash — turned it into $48,000! We then put it into a term deposit with NAB, and it has now reached about $63,000. Should we leave it in term or invest in some kind of stock without paying exorbitant fees? We have about 10 years before we give the money to our grandson.
You need some tough love.
Here’s an uncomfortable truth: if at the start you’d invested that $60,000 into a basic no-brainer ASX 200 index tracker fund, your grandson would have around $111,500 today — that’s an extra $51,500.
(The compound return for the ASX 200 since 2006 has been 6.1 per cent per annum, including through the GFC). Oh and by the way, Listed Investment Companies like the Australian Foundation Investment Company (AFIC), which I always bang on about, have performed slightly better over that time.)
Yet that’s done and dusted, so let’s talk about the next 10 years:
If you stick with your current strategy of investing in fixed interest, in 10 years you’ll hand him a cheque for $84,667.
However, if you invest in an ASX tracker fund today (and assuming a nominal 8 per cent return going forward, which is absolutely not guaranteed), it could grow to $136,000.
(And at the risk of rubbing salt and vinegar chips into your wounds, if you’d stuck with the index for the entire period, you would likely be handing him over a cheque for $221,799.)
Now over the years I’ve helped a lot of orphans, and their guardians. Here’s what I’d suggest:
You should investigate the most tax-effective structure to invest in for your grandson. I’d talk to a financial advisor about the benefits of investing in an old-school, low-cost investment bond versus a traditional trust structure.
Right now you’re probably feeling a little gutted. However, let me tell you — you haven’t even made your biggest mistake yet…
How to Ruin a Kid with One Piece of Paper
Regardless of where you invest the money, the biggest mistake you could make is to hand your grandson a big bloody cheque on his eighteenth birthday.
I don’t care how mature he is at 18; he’ll still be a teenager. And that means he’ll have about 10 years of stupid to get out of his system. Money and stupid don’t mix. Just look at Justin Bieber, or for a long-term compounding example: Charlie Sheen.
And, what’s more, your grandson doesn’t need to spend money on his higher education: the loan terms on HECS-HELP are a no-brainer — let the Government loan him the loot.
Here’s How to Make it All Better
Start planting the seeds over the next 10 years. Teach him about compound interest. But not with complicated charts or maths — the best way is to make him take a part-time job when he’s a teenager, and then tally what he earned for the year flipping burgers against the dividends his portfolio has passively earned that year. Your end game is to have him make the decision to leave his money invested in low-cost Australian and international shares until he’s 28 years old (roughly another twenty years).
Then, on his 28th birthday, I’d strongly encourage him to buy a home for him to live in. Depending on how his investments have done, he’ll either have enough money to be able to afford one outright or to put a huge deposit down, which will mean he’ll own his place outright at a young age. And that allows him to circle back and continue investing.
Just make sure he has legal agreements in place that will safeguard him against anyone taking his money. As a father myself, knowing that my son had his own home (and that he’d earned it) would help me rest in peace. Good luck!
Wouldn’t It Be Nice?
There’s an ad on the telly at the moment which you might have seen:
A young, heavily pregnant woman is enjoying a barbie with her parents, in the front yard of her weatherboard home in what looks like a battler suburb (hubby’s cooking the chops).
Her old man cocks his head and, with wry smile, takes her aside. He has a surprise for her.
(Cue gentle uplifting background music.)
He hands her a letter that says “to our darling daughter”. It’s a cheque to pay off her mortgage. She looks at him in disbelief, starts crying, and hugs him. Then the entire family starts hugging.
“This (slightly dilapidated weatherboard home in said battler suburb) is all yours now … not the bank’s.”
(Uplifting music reaches crescendo.)
You bloody bewdy! He’s won the lotto!
The ad ends with “Wouldn’t it be nice?”
Well yes, it would be nice, but it’s a 1 in 45,379,620 chance, so let’s not bet all our snags on it.
Instead, let’s talk about getting better odds.
The turning point in my life can be traced back to just a few conversations I had with wise adults when I was a kid. They talked about basic ideas of investing and the power of compound interest, and the joy of hard work. I didn’t realise it at the time, but it totally changed the course of my life.
Here’s the thing: you have the ability to change a young person’s life. Whether you’re a grandparent, a parent, an aunty, an uncle, a teacher or a coach, don’t ever underestimate the power of a couple of meaningful chats (stories about your life work best), mixed in with a healthy dose of encouragement as a kid is growing up.
You don’t need to give them a big cheque. You can give them something much more powerful: a sense of confidence and optimism — the building blocks to tread their own unique path in life.
Tread Your Own Path!