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Monday, 12 September 2016

Investing For Stealthy Junior

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A picture of our newborn son. Don't
worry I was horrified too - I mean, a ginger!
I am proud to announce that the Stealthy household has welcomed a new addition! Super exciting times! Now before you all start shitting me out for being a bad father by writing blog posts instead of enjoying the first few days with my newborn son, I can explain... You see, thanks to the power of technology, I was able to write this post before my son was born and schedule it to go online a few days after. So right now I am probably changing my first diaper - I am predicting a greeny yellow colour. Eeew! Ok, wow! TMI! But seriously, I will let you know if I was right :-P

Us humans are pre-programmed to immediately start thinking about our offspring's future and how we can make it as awesome as possible for our little shits children whom we love dearly. So naturally Stealthy Junior was already giving me and the missus headaches long before his arrival. You see we knew we wanted to set up an investment account for him to give him a head start when the time was right, but we had some difficult decisions to make.

Our thinking went something along these lines....

I knew this would be a long term investment - the money was only needed in around 18 years time. Equities was therefore the obvious choice for us. I also knew ETF's were the way to go because of the low cost and the diversification they offer. So at least we had a starting point.

What are the options?

So with that out the way, we had a few options:
  1. An account in either my wife's name or my name, which could then be cashed out when required.
  2. An account in our son's name which would automatically become his when he was 18.
  3. A TFSA account in our son's name which would automatically become his when he was 18.
I then pictured a conversation which could possibly unfold in a number of ways, and the response our son would get:

Son : Dad, you my hero. I want to study Engineering just like you, can I go to University?
Me : Yes go for it! If you want to study further the funds are available.

Or

Son : Dad, I want to move to the Netherlands and grow Tulips.
Me : Awesome, luckily we have saved up some money and we can help you achieve your dream. Be sure to send some home for your mother.

Or

Son : Dad, my friends and I want to go for a boy's weekend to Vegas.
Me : Sounds awesome - if we only we had the money!

You see as much as I would like to think that my son will grow up with sound financial principles, nothing is certain. So when he is 18 he may well want to blow the money on a fancy German sedan, or even worse, some Arsenal kit! :) If the money automatically rolled over to him, it may not end up being used for the purposes we intended, and there would be nothing we could do about it. So this eliminated option number 2.

Option number 3 can be eliminated by a similar argument. It would be very nice to start a TFSA for our son from such a young age, but the worry is the same. He could very well blow the money, and what is worse - the money withdrawn from a TFSA cannot be put back in. You see there is a lifetime limit (currently R500k) that you can put into a TFSA account. Once you hit that limit, you cannot add any more. So say now we were able to get to the 500k level by the 18 year mark, and our son decided to blow some of it, he would not be able to add anything extra throughout his working career. This will put him at a serious disadvantage should he then later wish to score on Tax while saving for his retirement. We would hate to take that away from him (even though it would be his own fault!).

So I would prefer that when he begins his working career he starts his own TFSA with the full allocation available to him.

And the winner is...

So that only leaves option number 1. This is a little unfortunate because it comes with one massive disadvantage... Tax! If the account is in my name, or my wife's name, and we then cash it out, we will be subject to all the wonderful capital gains taxes that comes with redeeming a long term investment. Now as much as this really sucks, at least this way we know that we will be in full control of the money, and we can allocate it to something that we know will be worthwhile, like a University education.

Ah yes....to be 18 and stupid again....
Then as a compromise we are also planning on opening a separate Investment Account. This one will be in our Son's name. This account can be used for people to deposit any Birthday presents, Christmas presents, or similar monetary gifts. This should grow into a decent amount by the time Stealthy Junior is 18, and he will hopefully use it for something worthwhile, like maybe a deposit on a house, or to get his first car without going into debt. But hey, boys will be boys, so if he wants to blow it all on a massive 18th Birthday Party in Thailand, or something like that, then so be it - it is his money after all.

So that is basically how we are handling the investing for our child situation. There are many ways to skin this cat, but for us this makes the most sense, and the way we see it, it is sort of a compromise between ensuring there is money for the boring stuff like University, and blowing money like only a stupid 18 year old can :)



Till next time, Stay Stealthy!

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