Sun. Sep 15th, 2019

Investing for your new baby

Baby with parentsIf you’ve recently had a baby, now may be time to revisit your investments.

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There’s no question that having a baby is a life-changing event. Not only from an emotional perspective, but from a financial perspective too.

All of a sudden you’re faced with a number of additional costs. From buying nappies, visits to the doctor, baby clothes and (of course) finding the best nanny or school possible.

With all these changes, you may be wondering whether or not it’s necessary to revisit your investment portfolio too? The short answer is yes. Having a child means that your financial goals are likely to change and it’s important that you align your investment portfolio to meet your objectives. As a new parent, this can be a daunting task, especially if you’re not particularly investment savvy.

So to help you out, below are a few tips on how to structure your investment portfolio to meet your new financial goals.

Step one: Define your goals

Probably the easiest way to start structuring your portfolio is to begin with identifying what it is that you want to achieve. Are you investing towards a bigger car for the family, or your child’s education, or perhaps a much-needed family holiday?

Regardless of what it is, each of your goals should have a monetary value (or target) that you’re aiming to achieve. Even though it’s highly likely that this value will change over time due to inflation (more about this in the next section), the most important part is knowing what you want to achieve with your investment.

Step two: Define your investment time horizon

Once you’ve decided what it is that you’re investing for, the next step is to define how long it will take for you to get there. Some of your goals might have a fixed timeframe (such as saving for your child’s education), while others might be more flexible (such as a family holiday).

In the greater scheme of things, it’s important to know which timeframes are fixed and which ones are variable. This is because your variable goals are usually far easier to adjust as your financial needs change, compared to your finite goals that have a fixed timeframe.

When deciding on your investment term, you’ll also need to estimate the future value of your goals. One of the key factors here is inflation, which is basically the rate at which the cost of goods increases over time. Of course you’ll never know exactly what the future cost of an item will be, but going through this exercise gives you a good indication of what your end-goal looks like and how much you’ll need to save in order to get there.

Step three: Define your rate of return

Once you have decided on your investment timeframe, you can use it to help you determine the rate of return that you can expect. As a rule of thumb, the shorter the timeframe (say, 1 – 3 years) the less risk you can afford to take as you have less time for your investment to recover if markets are down.

In these cases, it’s usually better to choose a more conservative investment like money market or income funds, which invest in low-risk securities like cash and short-term bonds and notes. These funds have histories of delivering returns of inflation + 1% and inflation + 2%, respectively, while protecting your capital.

Meanwhile, a medium-term goal of 3 -5 years would suggest that you should invest in medium-risk funds like low-equity or high-equity “balanced” funds. These multi-asset funds have histories of delivering inflation + 4 – 5% and inflation + 5 – 6%, respectively, over time.

They invest in a variety of high-risk securities like equities and listed property in order to increase the chances of a higher return, along with lower-risk bonds and cash to reduce volatility and protect your capital. The higher the proportion of equities and listed property, the higher the potential return over time.

You’ll need to stay invested in these funds for at least 3 years (for low-equity funds) or 5 years (for high-equity funds) to get the best possible return.

Finally, with a long-term timeframe of at least 5 – 7 years or more, you can generally afford to take higher risk as your investment has more time to recover if markets are down. Higher-risk investments, such as equity and listed property funds, have histories of delivering inflation + 7% over the long term. To get the best possible return out of these investments, you’ll need to stay invested for at least 5 years (listed property funds) or 7 years (equity funds).

Step four: Define how much you’ll need to contribute

Now you know:

  • What you want to save for;
  • How long it will take for you to reach your goals;
  • The estimated future value of your goals; and
  • The estimated rate of return.

The next step is to define how much you’ll need to contribute, either as a lump sum upfront or on a monthly basis. To help you with applying each of the above variables to your investment goals, below are some practical approximate examples covering short-, medium- and long-term goals.

Short-term goal: Saving for a car seat

Once your child reaches 12 months’ old, you’ll need to buy him or her a
new car seat. The current cost of a new car seat and base is around R4 000.
Assuming this amount increases by an inflation rate of 5% per year, the future
value in 12 months’ time will be around R4 200. A 12-month investment in a
money market fund at a real return of 2% means that you would need to invest
roughly R340 per month to reach your goal.

Medium-term goal: Saving for primary school

Although tuition at the best schools can be extremely expensive, the good news is that you have at least 5 years to save before your child starts Grade R. This means that you can opt to invest a balanced fund with an expected real return of 5%. Assuming the current cost of education is around R35 000 per year and continues to increase at an inflation rate of 9%, you would need to invest roughly R5 160 a month (with an annual escalation of 5%) for 5 years to have a large enough pool to pay for your child’s primary school education for the next eight years.

Long-term goal: Saving for high school

If things go according to plan, within 13 years your child should be starting high school. This means that you have a long enough horizon to invest in an equity fund at an average real return of 6%. Assuming that the current cost of high-school education is around R46 000 per year and continues to increase at an inflation rate of 9%, you would need to contribute roughly R1 680 a month (with an annual escalation of 5%) for 13 years to be able to pay for your child’s high school education for the next five years.

Working out how much to invest in order to reach your goals can be complicated, so it’s probably best to plug your investment information into a goal calculator or to speak to your financial adviser. Alternatively, for more information, please contact Prudential’s Client Services Team on 0860 105 775 or query@prudential.co.za.

Did you know that you can open a new investment online in under 10 minutes? For more information, visit the “Invest Now” section of Prudential’s website.


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