It’s amazing how quickly 18 years can pass. One minute you’re having a baby shower and the next they’re off to college. Fortunately, 18 years is enough time to build up a fund for your child’s future. In fact, you can build up a very decent fund for your kid (or yourself) in a much shorter time-frame. You just need to be smart about it. Here are some tips.
Everything starts with basic budgeting
Financial management essentially means using your money where it makes the most difference in your life. As a rule of thumb, you should prioritize high-interest debt repayments (e.g. credit cards). There are several reasons for this.
The mathematical one is that the interest payments on your credit cards are likely to be more than even the best investment returns. What’s more, you’re committed to making debt repayments (including interest). Investment returns, by contrast, are never guaranteed.
Once you come to low-interest debts, like mortgages, the situation can be a bit more complicated. If you’re confident that you can make your mortgage repayments, then it often makes sense to invest your spare cash. There is a risk involved, but the rewards can be worth it.
Only invest your spare cash
Before you start any form of investing, make sure that you really can spare the money you intend to invest. Remember that investment is a long-term activity. Over the short term, you may not be able to sell an investment to recoup what you paid for it. That’s before you add in the impact of transaction costs and possibly taxes.
As a minimum, you should be confident that you can maintain a sufficient level of income for your needs. You should also have savings put away for planned expenses plus a general “emergency fund” and appropriate insurance cover.
The basics of investment
Investment is a bit like planting a garden. You need to choose the right seeds for the right conditions and give them time to grow. Just as with seeds in a garden, different types of investments require different levels of skill to manage. You can start with the “beginner-friendly” options and then progress if you wish.
Although there are many different investment options all of them are assessed in terms of one or both of two criteria. These are growth and yield (income). Growth investments increase in value but you only get the benefit of this when you sell them. Yield investments bring in an income you can use as you wish.
Some investments combine the benefits of both growth and yield. For example, one of the reasons why property investment is so popular is that you get the benefit of house price increases plus rental income.
Understanding stocks v rental property
When you buy stocks you buy a share in the ownership of a company. This is why stocks are also called shares. It’s easy to get started in the stock market. You just set up a share trading account, fund it and then buy and sell what you want just like on a regular e-commerce store. You can invest small amounts of cash whenever you have it spare. There’s no commitment.
When you invest in rental property, you need to go through the process of finding and buying a suitable property. This generally means you either need a significant amount of investment capital or a mortgage. Once you take on a mortgage, you commit to paying it for as long as you own the property (or until the capital is paid back completely).
The whole point of rental property is to let it out to tenants. This means that you have to find the tenants. Then you have to think about tenant management and property management. You don’t necessarily have to do any of these yourself. You do, however, need to make sure that they are done.
This can make investing in rental property a bit more demanding than investing in the stock market. On the plus side, it can also bring excellent returns. This is another one of the reasons why it is so popular.
Investing versus side-hustling
Investing is largely about generating passive income. You do have to manage your investments, but this essentially means ensuring that your investment portfolio reflects your goals. Side-hustling is about working to generate extra income. Once the work stops, the income stops – unless you invest your side-hustling income to provide extra, passive income.
It can be challenging to run a side-hustle when you have a family, especially when they’re young. Side-hustling can, however, be a great way of generating extra income which you can use for investment.
Choosing the right investments for you
A lot of your investment choices will be determined by your available funds and your timeframe. For example, if you have limited funds to invest, then you may not be able to buy an investment property. You could, however, invest in stocks, including stocks related to firms active in the property market.
If you have a long investment timeframe, then you might be willing to take on some riskier investments. For example, if you start investing for your child as soon as you know they’re on the way, you have 18 years to build their college fund. That means you have time to recover from any investments which don’t work out.
On the other hand, if you only start investing for your child when they’re in their teens, you may need to stick with safer options. You have less time to build up funds for them before they’re ready for college. This means that you have less time to recover from any investments which don’t work out.
Think about how much flexibility you need
Parents who can generally start putting together a “college fund” as early as possible. That’s usually a great move. You just need to keep in mind that your child may decide that they don’t want to go to college. This means that you might want to think twice about any investment options which are designed for that specific purpose and opt for ones with more flexibility.
It’s often ideal if the investments you make for your child’s college fund can also contribute to your other financial goals. For example, if you already know you’re interested in retiring in a particular area, you could invest in property there. This could bring you in a rental income to help with your child’s college fund. Then you could use the property yourself.
Get your child involved
There are two good reasons for getting your child involved in building up their own college fund. Firstly, it will give them a clear overview of how the investments are performing. This will help to reduce the likelihood of them getting unrealistic expectations of what you can do for them.
Secondly, building up your kid’s college fund is a great opportunity to help them learn the financial lessons they will need as an adult. They’ll get to see how you earn the money to pay the bills and how you budget it. They’ll also learn why you choose your investments and how you monitor their performance.
You might even want to give your child some degree of control over what investments are picked. At the very least, encourage them to give their input over what you choose. Your child may know more about some topics than you do, especially when it comes to trends and technology.
Last but not least, never be afraid of making investment mistakes. That’s how you learn and it’s how your child will learn. As long as you’re investing within your budget and time-frame, you should be able to cope with the occasional wrong decision.