When your kids come along, get out the chequebook.
We're not just talking about spending on necessities such as Lightning McQueen runners, Level X Pokemon cards, and Harvey's flame-broiled hamburgers. We're also talking about investing in college funds, a roof over their heads and life insurance so they don't end up destitute if one or both parents meet with an untimely demise.
"I didn't realize parenthood also involved being a portfolio manager for my kids," says Anne Mac, an Ottawa mother of two young boys. Perhaps that's a slight exaggeration but the fact remains parents do have to make decisions on how to best invest family resources for the sake of their children.
Here are five pointers to consider as you weigh expected returns and risk levels. The pointers may not transform you into the next Warren Buffett but could nonetheless leave the kids saying, "Thanks, Mom and Dad!" The online version of this article at tgam.ca/globeinvestor has more pointers and details.
1 Best place for education funds: One of the best places for a child's education fund is inside a registered education savings plan (RESP) thanks to government grants and tax-deferred accumulation. But it helps to know all the wrinkles. For example, not all RESP providers transfer the low-income grants into the plans. "Ask the provider if they offer the grants before you sign up," advises Mike of the Four Pillars blog.
2 Become a couch potato: A popular choice within the financial blogosphere for investing RESP funds is the Couch Potato Portfolio. It takes only 15 minutes a year to manage and beats most money managers, MoneySense magazine says. The Million Dollar Journey blogger owns TD e-Series Funds that track mostly stocks (Canadian, U.S. and international markets). In the final years of the RESP, he'll reduce risk by shifting to guaranteed investment certificates and money-market funds.
3 Playing it safe: Jim Yih, a financial adviser with The Retirement Think Box in Edmonton, has put half of his young kids' RESP funds into a balanced mutual fund and the other half into interest-earning securities. "I look at it like I am the trustee of the funds and have a responsibility to be prudent," he explains. This conservative approach won't shoot the lights out but it'll likely avoid losses - something the kids might not look kindly upon!
4 Buying a home: "My best move would be never spending too much on a home," says Tim Stobbs, author of the blog: Canadian Dream: Free at 45. "We will likely be mortgage-free by the end of current term, which would mean we only had a mortgage for less than 10 years." For Margot Bai, author of Spend Smarter, Save Bigger, her best financial move was going with variable-interest-rate mortgages - she has saved a ton of money that way.
5 Dealing with mortality risk: "One of the first things I did when I found out my wife Edna was pregnant with my eldest daughter was to rush out and get some life insurance," notes York University professor Moshe Milevsky in his book, Wealth Logic. Or you can self-insure like Mr. Milevsky's father did - except it might be better to save before the kids arrive.