Parents want to do the right thing for their child but opening a KiwiSaver might not be the smart move you think it is.
Let me start by saying that KiwiSaver is an amazing tool for building wealth. Since it comes directly out of your pay if you’re employed, it’s almost invisible. The money never actually hits your bank account. Add the fact that your employer also matches up to a certain percentage and it’s a no-brainer.
Now, everyone says start a KiwiSaver for your kids as early as possible. But is that really a good idea?
I don’t think so. Here’s why.
Let’s start by acknowledging the benefits of Kiwisaver:
- Government contributions: For every dollar you invest or your child contributes, the government adds up to $260.
- Compound interest: Small amounts can grow a lot over a lifetime. This isn’t unique to KiwiSaver though.
- Financial habits: Some parents think having a KiwiSaver early teaches kids about saving and investing.
These all make sense, but there are some big downsides as well.
Money is locked away for decades
Kids can’t access their Kiwisaver until they turn 18. Even then they’re only allowed to withdraw early for specific reasons such as buying a home, moving overseas or financial hardship, among others.
Government contributions don’t apply
The government contribution of up to $260 only comes into play once kids turn 16. Any contributions earlier than that don’t receive the government bonus, which reduces the value of starting very early.
Kids don’t learn real money skills
KiwiSaver alone doesn’t teach them budgeting, earning or financial responsibility. It can seem abstract and invisible because they can’t see or use their money like cash. A better approach would be to give them small amounts to manage themselves and divide it up into spending, saving and investing. Giving them control of their money and making mistakes along the way is how financial habits actually form.
Better alternatives
Instead of KiwiSaver for kids (or grandkids), consider these options:
A regular investment account
You can usually invest in the exact same funds as KiwiSaver in a regular investment account. The big difference is that you can access that money at any time. There’s no need to ask for permission or meet certain criteria. Since kids don’t get the government contribution until later, going this route keeps their options open.
A dedicated savings account
Depending on the age of the kid, a savings account can be a great option for short-or medium-term goals like education, a first car or an overseas experience. For anything longer than 10 years an investment account focused on shares would be a better option.
Final thoughts
I’m a big fan of KiwiSaver and think everyone should join to get a least the government and employer contributions. That’s great value right there. For children though, I don’t see much value in making them join before they start their first job. Their money will be locked away for the foreseeable future without them having much control over it. What if they don’t intend to buy a house? What if they could use the money sooner to start their own business? That’s why I much prefer putting money for my child in a regular investment account that they will be able to access once they’re an adult. I’d hope that it stays invested for a very long time but that’s really up to them.
Instead of using KiwiSaver as a way to “force savings”, I’d much rather let them make their own decision to join the scheme once they’re older. In the meantime, I’ll do my best to teach them how to manage their money so that they’re well equipped for the future.