Author Topic: Advice Please!: Don't want to buy my baby crap for 1st BDay...portfolio advice?!  (Read 2565 times)

mwoodid

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Dear Mustachian's,

My beloved first born is approaching his first birthday and I would love to open a Vanguard account for him that we can contribute to annually and hopefully grow into something he can use down the track.  I absolutely DO NOT want to laden down his world with a bunch of crap and would rather put my/his money towards something more constructive.

The big glaring problem, however, is that I don't know what this would look like.  Can you provide any advice, guidance or insight into what type of "portfolio" might be good for a minor that I can contribute to annually?  My financial literacy is very poor, and although I am actively working on improving that, I do not have much confidence in my ability to proficiently navigate this field.  We live in Australia and there is an Australian Vanguard, but am unsure of how different those options are compared to the American?

Many thanks in advance and warmest regards,

mwoodid

hodor

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Hi!

Great you're thinking of your son so early. Tax rates aren't good for one year olds here in Aussie which is something to consider.

For listed stuff the simplest approach is VAS and VGS. VAS is basically the 300 largest companies in Australia and VGS the 1500 outside. Don't think you could go wrong with these two.

Vanguard offer unlisted funds which might be easier and you can set up direct debits. Check their website.


mwoodid

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Dear Hodor (love the name, BTW),

Thank you very much for your response.  I will look into VAS and VGS.  It is really great to have a starting point and your advice is very much appreciated.

A quick and embarrassing question: you noted that the tax rates are good for one-year olds in Oz and that I should keep that in mind....does this mean he would need to pay taxes on the money going into the account?  I feel quite stupid asking this....apologies.

Cheers and thanks again.

hodor

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Tax free is only up to $416 for minors, 68% to $1307 then 47% thereafter. Part time job income is taxed as normal.

https://www.ato.gov.au/individuals/investing/in-detail/children-and-under-18s/income-of-individuals-under-age-of-18/?page=4

My understand is there is no need to pay money you gift to the account (your regular contributions), tax will be paid on dividends from the shares. VAS pays just under 5% and VGS around 2.6% - if you go 50/50 on these two once the balance is around $10,000 he will be paying income tax.

VAS and VGS both have Dividend Reinvestment Plans (DRP) where dividends automatically buy additional shares at the market price without the need to pay brokerage. This is still taxable however. Not really an easy way to avoid the tax man.

I would just be buying VAS and VGS as they have the lowest fees and have a great chance of providing excellent returns, plus you won't need to sell which would initiate a capital gains event - i.e. the profit made from any gain in price is taxed. VAS and VGS are buy and hold type investments that you never need to sell.

Alternatively you could just open a separate bank account and trading account and do it all in your name and gift them when he turns 18. Not as fun though and won't be as educational.

One last thing don't get distracted by anything with high fees and past performance, keep things simple especially at the start. This is another lengthy topic in itself so I'll leave it there.

I am not a tax adviser so everything is just general comments.

mwoodid

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Dear Hodor,

Very informative and helpful response.  I understand completely that it is just guidance, etc.  I will check out the ATO link you sent.

I didn't know you had to pay taxes on "theoretical" money....because the market goes up and down, daily, one minute you might be winning and the next minute not...how can you pay taxes on the up and down?  I thought you only paid taxes on what you actually make when you "cash in" so-to-speak....I know, I must live in some sort of Utopia in my mind.  Sigh.

Thank you again, Hodor.  I know where to start looking now.

Cheers,
mwoodid

mwoodid

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One more question, Hodor!  I meant to ask in my initial but I forgot.  With Vanguard, are there options for ethical, green, socially conscious, etc. funds?

I promise, no more questions!

Cheers,
mwoodid

hodor

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Keep asking, happy to help where I can.

With the tax, you aren't paying tax on the ups and downs. As noted you pay on capital gains if you sell at a profit. The other time is on the income you receive as dividends, VAS and VGS pay 4 times a year, most dividend paying companies only pay twice. VAS is currently about 4.5% over a year and VGS 2.6%, these add up in the long run. VAS is partially franked which means some tax is already paid which you get credit for. VGS is unfranked.

No green or ethical funds in vanguard that I am aware of. One's I have seen have fees that put me off and I'm not convinced by the concept after doing reading on it.


Goldielocks

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Not quite what you asked for, but DH bought his young nieces "one Disney Share", with framed stock certificate to hang on their walls.

This of course, costs a lot extra compared to plain stock (maybe $100)...   But they receive dividend cheques (if any) and annual Reports.  The Annual reports are FILLED with neat-o graphics because it is Disney.

They get to grow up learning what it is to be a shareholder of a company.


I know that I received $200 in stocks for a company when I was 5 or so, and that $9 check each year made an impression on me every time I put it into my bank account.  Maybe that was how my MMM was born?

mwoodid

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Hi Hodor and Goldilelocks,

Thank you for your replies.  Hodor, your explanation re taxes was brilliant and I get it now (one small step at a time!). 

Goldielocks, I LOVE that you remember the dividends coming in each year!  I think you are on to something re the birth of MMM!  Hodor also noted what a great financial learning experience this can be for a child and I am determined he doesn't end up as clueless as I am re finances....whether he ends up rich or poor or somewhere in the middle is neither here nor there, I would just like him to at least have the knowledge to use as he may when he embarks into the world as an adult.

I am going to look into the V portfolio options....Even if "he" loses every penny, I still feel better about doing something like this than throwing a party with all the smoke and the lights and the inevitable plastic....that in the end he won't even remember and/or care about.

MASSIVE thanks for the tips.

mwoodid

money_bunny

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Is there a college thrift account in Australia? Similar to a 529 in the USA?


Scandium

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I've thought about this for my 2 year old, but in the end I just put whatever I can into my taxable account. If I decide to give him money if he needs it when he's older, there's no difference between having $1,000 more in my account and him having an  account with $1,000 in it. If anything it's worse since he could then spend that money on whatever he wanted, unless it's set up in my name. Which again would be the same as me just having one account.

I do have a college savings account for him, and will try to set him up with a retirement account as soon as he earns money, but for now I just keep everything in our one Vanguard account.

hodor

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Is there a college thrift account in Australia? Similar to a 529 in the USA?

Not that I know of.

No need for so many accounts here.

There is super for retirement and maybe trusts. Nothing to reduce taxes like I understand a 529. So many accounts needed in the US, hurts my brain reading all those numbers.
« Last Edit: May 27, 2016, 03:04:40 PM by hodor »

mwoodid

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Hurts my brain too ;) 

My son has dual citizenship with the US, however, we have no financial accounts tor dealings there.  I think my sister tried to set up a "college" account for him there, but then decided against it b/c she wasn't sure if "where" he went to college affected it (as in if he went to school here in Oz, etc.) as well as the whole fact that he may not choose that path in life....As a parent I hope he does, but I am very aware that we all have our own journeys. 

So many things to think about!  Thank you all for your tips and ideas.  My mind is buzzing ;)