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The current economic climate is presenting major challenges for consumers, and an improved savings culture may seem an unachievable goal in the short term in a country where the savings rate is just 15.4% of GDP.
These statistics from the South African Reserve Bank highlight the need for consumers to address the low propensity to save. An early-age introduction of financial concepts, such as retirement planning and budgeting, may be one of the solutions needed to improve our savings rate and reduce dependency on the state.
For parents stumped as to where to start the process with their children, let alone the conversation, setting learning markers for pre-schoolers, pre-teens and teenagers is recommended.
A blog by investment management firm T. Rowe Price in the US tells us that five-year-olds can understand terms like “savings”, “goals”, “banks”, and “trade-offs”. At age 10 children can understand concepts like “time horizon”, “loans”, “interest”, “inflation” and “taxes”. By age 15 more complex definitions like “stocks”, “bonds”, “asset allocation” and “diversification” should have entered the lexicon.
While the idea of investments, with exposure to underlying asset classes such as equities, property, bonds and cash may be daunting to some, you don’t need a fortune to start investing in your child’s future.
Whether it’s R250 a month, R100 or R50, it is important to start saving as soon as possible; only then will your child receive the full benefit of compound interest over time.
For example, if you were to invest R5 000 into a fixed deposit upon the birth of your child and add R100 a month for 18 years into the pot, you’d have over R46 000 after 18 years. Should your child continue to contribute R100 monthly into the same account until their retirement at 65, the amount would be close to R700 000. This assumes no increase in contributions and a steady annual interest rate of 5%.
South Africa’s new Tax Free Savings Accounts (TFSA) are a great option for parents to explore. This avenue allows parents with the means to save R30 000 a year, tax-free, for their children. This is a great option for all individuals in South Africa and an invaluable foundation that parents can lay for their children’s financial future.
Parents do need to remain cognisant that investing on their children’s behalf also means that the child’s lifetime contribution limit toward tax-free savings (currently R500 000) will be reduced with each premium contributed.
Practically, if a parent contributed - over an 18-year period - premiums totalling R250 000 toward a TFSA in their child’s name, the child will have a total contribution limit of R250 000 available over their lifetime towards such tax-free saving.
Another option is investing in a retirement annuity in your child’s name from R250, depending on the institution you are dealing with. This way you could gift your child with multiple years of compound growth.
It also presents tax benefits for the contributing parent, which can be passed onto the child when they take over after the age of 18.
Of course, educating children about money is not just a case of philanthropic parenting; it also forces parents to take responsibility for their own finances, thereby taking pressure off younger generations in years to come.
This is a very real concern where a generation of South Africans find themselves increasingly responsible for their children and also ageing parents who have not made adequate provision for retirement.
*Preenay Sathu is channel head at FNB financial advisory.
