Simple plan to guarantee your kids’ financial freedom

Follow this simple plan to set your kids on the road to financial freedom.

I have to applaud the authorities for adding an incentive to save for South Africans. We really need to work hard on our savings culture. I’ve crunched a few numbers and by sticking to a simple discipline you can set your kids up to accumulate wealth to the order of R 24 million (in current day terms) by the time they are 65. Can you imagine what a different world it would have been if every 65 year old today had R24 million to enjoy their retirement years?

Let’s work with the following parameters.

  • Initial monthly contribution: R 1000

  • Average monthly return: 15%

  • Inflation rate to calculate current day value: 5%

You start investing R 1000 on behalf of you children form age 0 in a tax free vehicle. Remember you can donate assets to the value of R 100 000 per annum tax free. You escalate the monthly contributions by 5% per annum up to age 6, the year your little legend goes to school. By this time the monthly expenses are due to rocket with school fees, uniforms and so on. From age 7 you reduce the monthly contributions to R500 per month and once again step them up by 5% per annum up to the age of 18, the time they hit varsity.

By the time they start varsity you would have accumulated about R 215 000 in current day value. You now have a massive decision to make, if you are in the position to choose. You can either apply these funds to help pay for that tertiary qualification. At Maties the average tuition fees are R 40 000 per year. That means you have enough to pay for a three qualification. A qualification will not ensure their financial freedom, but at least they will have acquired those ever important life skills you pick up at varsity. By this time they can start investing a portion of their income in a tax free vehicle.

Now if you are in the fortunate position to make provision for tertiary studies elsewhere you can continue to contribute the R500+5% until they reach 21, junior can now manage the investment on their own. I would however suggest that you make arrangements that they cannot access the funds before 30 or so. No sense in them blowing the funds away you so painstakingly set aside. Should they manage to keep their hands off the money until they are 65 years old, that little R1000 per month you started with would have accumulated to R24m in current day value.

The above plan will ensure that you only donate R 180 000 to the R 500 000 lifetime limit of your children’s tax free savings limit. Chances that you reach the annual limit of R30 000 per person are very slim, unless you have twins or more than two kids separated by a year each.

Can you imagine the social impact this could have on future generations if our generation help to set them up for success?