Good on you for starting now .
Starting a regular savings plan for your baby daughter is a great gift for the future.
Albert Einstein called Compound Interest 'The most powerful force in the universe'.
If you start with $5,000, save just $10 per week at an assumed earning rate of 7.5% pa your daughter will have over $50,000 for her 21st Birthday.
Now back to your question.
You say that at the current time the amount available to invest is a modest and the below suggestions assume that the funds are less than $10,000 – if the amount reaches over this amount from say birthday and Christmas gifts, then you may want to seek some additional advice as the penalty tax rate on interest earned can really affect these savings.
So with the few thousand you currently have available, your options include:-
Option 1 - Savings Account
There are many online savings accounts available which offer reasonable interest rates. It pays to shop around as some of the traditional child / youth accounts can have very low rates.
o Simple and quick to set up
o You can add to the account on a regular or ad-hoc basis
o The amount is secure
o Cash is a poor long-term investment as it doesn't provide a very high investmen return
You will most likely be fine setting up the account in your daughter’s name so that the income does not make it’s way onto your tax return. You will need to obtain a Tax File Number for your daughter and ensure that the bank have this number from the outset so that PAYG withholding tax is not deducted.
Children under 18 do not pay tax on income (bank interest is taxable income) received below $416, however above this amount it will be taxed up to 66% (so it is not ideal for large account balances, ie. $10,000 +)
Option 2 - Managed Funds
You could set up a Managed Fund for your daughter where her money is pooled together with other investors and indirectly she will own shares, property, bonds.
Look for a low cost fund manager who can offer a highly diversified portfolio.
o Easy to establish
o Doesn't require expertise to select an individual company to invest in
o Over 10-year + periods shares/property nearly always have provided a higher rate of return than cash
o Compound interest at a higher rate will result in a larger final account balance
o It will be subject to the ups and downs of the sharemarket (but by being diversified will hopefully increase steadily over time)
o The investment is not guaranteed
Option 3 - Share Portfolio
As you may be looking for a vehicle for the long–term and something that you could hand to your daughter on her 18th or 21st birthday, you could consider buying a small portfolio of shares in your daughter’s name.
o Potential capital gains from owning an asset that can grow in value over time
o Potential income from dividends (or can look to Dividend Reinvest and keep building the share portfolio)
o Something to pass on that can keep on growing throughout your daughter’s lifetime and provide passive income
o You need to be prepared that shares can fall as well as rise and sometimes the share price of an individual company can fall to zero
o There can be regular decision-making required with company options, buybacks etc. Some people enjoy this involvement while others don't.
o The investment is not guaranteed
Your options are many and are dependent on how much you would like to see these savings grow and the risks you are prepared to take to make this happen.
However, starting something at this early stage is a very good idea and can be a nice gift to pass to your child later on.
If you require help to get started seek advice from a Certified Financial Planner.
By Darren Johns CFP®