08: How to save for your children in the short and long term

I got the idea for this episode from talking with Sally on Facebook. Hi Sally! She said she wanted to know how to save for her child in the short and long term. So I thought this would be the perfect opportunity to talk about what I did and how I started saving for my kids.

In episode 6 Savers are losers I talked a little bit about this so for those who are just joining me I will give you a recap.

When my first daughter was born I had been reading Noel Whittaker’s book Making Money Made Simple and in it he explains the power of compound interest and how it is actually time that generates wealth not the amount of money you have. He give an example of how two people want to save money, person A saves $1000 per year for 13 years and then stops. Person B dithers around for 14 years and does nothing then to make up for lost time person B starts saving $2000 per year for 35 years. Who ends up with the most money? You might be surprised to hear it is person A who only saved $13000 who ends up with $690000 while person B who saved up $70000 only ends up with $542000. This is all because of the magic of compound interest over time.

Well for the first time after reading this something clicked and I just thought, well my daughter is only just about to be born she has all the time of her life. I decided then and there I was going to save for her future because I knew I had time on my side.

We were only on one income at the time and had just bought a house so we didn’t have a lot of spare change. I decided that saving $15 per week was something I could realistically achieve so that is what I did. I call this minimum baseline saving. I also talk about it in episode 6 so you might want to check it out if you missed it.

For the next 4.5 years I saved $15 a week and when my second daughter was born I did the same for her. I had 2 high interest online savings accounts and I just stuck to my minimum baseline saving and put in $15 dollars for each daughter per week. Now at this stage I do want to add that a couple of years ago I can’t even remember why we had to do it but we were really tight with money and I ended up taking out $1600 from one of the accounts, I think it might have been when we were moving, I can’t remember. I did pay all of that money back into the account but I just wanted to tell you this because I don’t want you to get a mythical impression of me, what I mean is that it’s not like I save money and everything is rainbows and daisies. I have set backs, I sometimes spend more than I earn or get a big bill I didn’t account for.  Shit happens and I’m telling you this because I get better and better every year the more I learn and the more I practice healthy money habits but it takes time to change behaviour and get your finances to where you want them to be, well at least it has taken me time. Maybe you’re a quicker learner than me. So don’t get discouraged if you don’t have it all falling into place straight away is the point I’m trying to make.

OK so here is what I did next. I knew I didn’t want to just keep the money in a savings account because the interest rates are so low and barely keeping above inflation. I wanted that money working much harder for me.

I’m just looking at the goals on my office wall beside me and a couple of the things it says is: 'start researching funds to invest the girls nest egg' and 'ASX stock training'. I knew I wanted to invest the money but I have been so focussed on property investing that I have been out of the loop when it come to shares. I did buy and sell some shares in the nineties when Telstra floated, Does anyone remember that? It seems like everyone under the sun bought Telstra shares back then. So I knew I needed to educate myself about what to do.

On the AXS website they have an awesome education sections where they offer free online courses about what shares are and how to invest. If you are interested in investing in shares I might point out that if you have super you are invested in shares but anyway their training videos are really simple and easy to understand with graphics and they explain it all really well.

I got online and watched all the basic videos to get an overview and summary of how it all works. I recommend you check out the website.

Then I came across a book called the Millionaire Teacher- obviously I had to read that immediately and The Little Book of Common Sense Investing both these books explain what index funds are and what ETF (exchange traded funds) are and why it makes sense to invest in them.

Can I just say at this point you know I’m not a financial advisor right? I’m just simply sharing with you what I do so please check what is right for you. It’s important to talk about this stuff so that investing and money matters are common knowledge and that’s why I’m sharing my experience.

When you buy a shares in a company you are investing your money into that company and you now own a very small portion of that business and as part of that you get to share in the profits and the loses of that business. If you only invest in one or two companies it can be very risky as you are relying on that one company to do well. If they lose money or go out of business you lose all your money invested too. There is always risk associated with investing.

The difference with index funds is you are able to buy shares in many companies at the same time. For example you could buy an index fund of the Australian stock exchange, which would mean you hold shares in every company in the stock exchange or perhaps the top 200 or 500 companies.

According to marketIndex.com.au the Australian share market has returned an average of 13% per annum since 1900.

Yes the share market goes up and down but even considering the major crashes if you invested your money in shares in 1900 you would have received an average return of 13% not taking into account fees and taxes.   Nevertheless this is a pretty good return right?

Over that time some companies would have folded, some would have lost money and others would have done really well. That’s why it can be risky putting all your eggs in the one basket so to speak. However if you had been invested across all the companies as long as you didn’t sell after a major crash in the market you would have made a pretty good return.

Now no one can predict what is going to happen in the future and where people get caught out is they see the share price rising and think great better get in on this and then proceed to buy shares at the highest price or they see shares falling in price, panic and then proceed to sell the shares at their lowest price.  This is not a good strategy. However, if you buy indexed funds that represent the whole market and keep them long term, I’m talking a minimum of ten years, then it is likely you will have a good return.

This is what I have chosen to do with the money I saved for my daughters. Recently when the combined total of the money saved was around $6500 I invested that money in a low cost index fund. The cost of the fund is below %1 and this is important. If you invest in a fund and the cost is above %1 you are kissing goodbye to a large percentage of your profits over time.

You can basically buy the exact same indexed fund I invested in as an ETF but the reason I didn’t do that is because I want to continue investing that $15 every week that I save for the girls. So once a month I deposit $120 into the fund and I don’t have to pay any brokerage fees. If you only have a lump some of money that you will not continue to add to you may want to consider buying an ETF instead. The ongoing fees are much cheaper than what I pay for my fund. The difference is when you buy an ETF you have to go through a broker. Their fee can be between $8-$30 if you go through one online. This would not be cost effective if you wanted to add money every month, as you would have to keep paying the brokerage fee every time you bought more shares.

Whoa are you still with me?

In summary the steps I took were:

  1. I saved what I call the minimum baseline amount every week. For me this was $15 for you it might be $5 or $50 it all depends on what you can comfortably fit into your budget.
  2. Once the amount approached the $5000 mark, this took me over 4 years, I started researching how to invest it to get a better return than what I receive in the savings account.
  3. I read the Millionaire Teacher and The Little Book of Common Sense Investing, in that order. I found them most helpful in explaining how to invest for the long term and minimise risk.   I have only covered the very basics here today to get you thinking but if you are serious about investing in shares; take the time to educate yourself about it.  Just imagine you are researching your next holiday… it’s worth putting in the effort.
  4. I looked up some indexed funds. I worked out my risk appetite and then picked the fund that suited me. I picked one with a mix of Australian shares, International shares and bonds.

Ok you have the basics. What are you waiting for?

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