Money
How I'm turning $1000 into $28,000 for my kids
Forget handing over cash for house deposits – there’s a smarter way to future-proof your kids’ finances.
By Nicole Pedersen-McKinnon
How’s your concern level about your children’s financial future? Probably ranging from moderate to massive?
With sky-high property prices, there’s growing cognisance – and concern – that family wealth may soon be the only way to future wealth for younger people.
And already a type of living inheritance is flowing down to the next generation courtesy of thousands of Australia’s ‘Bank of Mum and Dad’ branches.
But what if I was to tell you there is a way parents can set children up for a far more affluent retirement, for very little money at all?
Because – quite aside from altruism for your offspring – it could save you a fortune.
Read this too: How to leave a legacy that means something
How to turn $1000 now into $28,000 for your kids later
Not many people realise that minors can have super… and anyone can pay in.
That, in itself, is a game changer to shore up the future of your children (and maybe any grandchildren).
But here’s an even bigger opportunity: an after-tax contribution of $1000 a financial year – just $19.25 a week – nets low earners the $500 co-contribution.
That’s free money on top.
Even one $1500 when your kids are 15 would become nearly $28,000 for them by retirement at 60, at a conservative investment return of 6.5%.
Imagine the impact of this if your children end up stopping paid work for a time to raise your grandchildren… it could entirely compensate them for the lost super contributions for doing so.
So let’s unpack how to get it.
How kids can qualify for the co-contribution
Firstly, that age of 15 might be key: to be eligible, a child needs to be earning in some capacity and so have a tax file number and file a tax return.
The second qualification criteria is that they must pay in the money to super themselves.
But, in reality, that is easy – you can just gift it.
So, breaking the strategy down into straightforward steps:
Step 1: The child gets a part-time job of some description (of course, this is great for them to both learn a work ethic and wrap their heads around managing money).
Step 2: You (probably) need to help them register for a tax file number.
Step 3: You/they must submit a tax return.
Step 4: Over that same tax year, however, gift them $1000 in instalments or a lump sum.
Step 5: They need to deposit that full $1000 into their super fund well before the end of the financial year.
And after that actually-quite-simple process, an extra $500 will land in their super fund – joining your $1000 – automatically.
So where does the other $27,000 to make the $28,000 come from?
Compounding.
As I say to every child who will listen (and I address lots of them in schools): young people have an incredibly powerful asset on their side… and that’s time.
Precisely because that $1500 (remember only $19.25 a week) will be invested for 45 years, it will earn returns on returns on beautiful returns.
So beyond turning into a fabulous financial boost for your child in their adult life, it will also serve as a valuable lesson in childhood that so-called ‘micro-saving’ makes a maximum difference.
Indeed, it could be a life-changing lesson if they also begin to micro-save themselves.
The life-changing (inheritance-saving!) money lesson
When you explain what you are doing for them with their super, also give them this precise micro-investment example… because to help your kids form the best money habits, you need to both walk the money talk and talk the money talk.
Here’s your script for your 15-year-old.
You: If you start investing $6 a day, and earn a pretty standard 8% long-term investment return, you will be a millionaire by 60.
Them: Bruh.
[But let’s assume they’ll instead say…]
Them: Oh really – that’s fascinating.
You: But for me to get to be a millionaire by 60, at age 45 [?], I’d need to save $95 a day.
[SORRY!]
Them: OK, I’m listening.
You: And, of that $1million we each have, I have had to save more than $500,000 myself… but you have only dipped into your pocket for $100,000.
You [the mic-drop moment]: Yep, $900,000 of your money HAS BEEN FOR FREE.
While you’re passing on your wisdom and fixing their future, also tell them about the first home super saver scheme…
The first home super saver scheme
This is another powerful potential adjunct to a family wealth-building strategy.
The first home super saver scheme lets first homebuyers stash cash in super specifically for a house deposit.
It can’t be money that’s already in there (ie., you can’t withdraw money for housing that has been contributed for the core super purpose: retirement).
What you can pay in is also capped at $15,000 a year or $50,000 all up across multiple years.
But that means two people can amass $100,000 to help get a home loan over the line.
You can pay in money via voluntary concessional contributions – using before-tax money such as through salary sacrifice or personal deductible contributions (ones you simply claim a tax deduction for).
You can also make these via the type of after-tax contributions we have been talking about, called non-concessional contributions.
And here’s the thing: should parents be inclined, they could over time also gift smaller amount of money to help their kids build this deposit.
Once your child is ready to buy, they just apply to release the funds along with the associated earnings.
Naturally saving in super – with all its tax concessions – means you grow your money quicker. Concessional contributions under the scheme are taxed at a discounted rate of 15%, generally lower than most people’s marginal income tax rate.
What’s more, although withdrawals of before-tax contributions for their first home are taxed at their marginal tax rate, they receive a 30% tax offset, reducing the tax burden.
But, let’s circle back to parents of under-18s who are helping them pay in $1000 a year after tax to net the superannuation co-contribution – the free $500 that began this article.
Guess what? You can secure the $28,000 that $1500 a year becomes… year after year.
In fact, all the way until they hit the$62,488 income cut-off (indexed-each-year).
And their post-work life – and your family – should be hugely more comfortable as a result.
This article contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their financial circumstances, objectives and needs.
Feature image: iStock/ferrantraite
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