We all cherish our children and grandchildren, and want them to have the best opportunities for a good start in life. To help them, many of us recognize the importance of setting up a saving plans for their future.
This article will lay out the various options for saving and explain each one’s advantages and disadvantages.
As parents, we are responsible for providing our children with shelter, food, clothing and education. We also like to celebrate milestones in our children’s lives, such as birth, bar/bat mitzvah, and weddings, all of which require considerable financing. We may also want to assist them with other events, for example higher education, travel or even purchasing real estate. Preparing in advance for these events by establishing a savings scheme is a good idea.
As a Family Financial Advisor, I belong to the Israeli Union of Family Financial Advisors and am also an active member on its Research Committee. We have conducted case studies about the advantages of saving, one of which was of a child’s bar mitzvah. We know this will happen 13 years after birth – ample time to save towards this milestone event. The committee compared families who saved for the bar mitzvah with families who did not save and found it necessary to take out a loan. The research found that the consequences were twofold for people who took a loan. The first: when you take a loan, it costs you money; this means the bar mitzvah costs more because the interest on the loan was not included in their calculation. People who actually saved for the bar mitzvah paid less due to the fact that the savings scheme incurred compound interest (interest on the interest) over the course of the 13 years. To illustrate let us take an example, and assume that the bar mitzvah costs NIS 20,000. If you saved NIS 16,000 and received NIS 4,000 interest on the saving scheme, the bar mitzvah only cost you NIS 16,000. If you took out a loan for NIS 20,000 and paid another NIS 4,000 in interest, the cost of the event was in fact NIS 24,000. The difference of the cost between the two events was NIS 8,000. Think what you can do with NIS 8,000.
The second point is very interesting. Research discovered that people who saved up for a bar mitzvah – whether NIS 5,000 or NIS 80,000 – rarely went over budget. These families understood that by working with a designated amount, they knew what they could afford and allocated the funds accordingly. These families recognized how hard they had scrimped and saved for this event and understood the value of the money accrued. On the other hand, people who had to take out a loan usually went over budget, taking the attitude that it was a once in a life time event that should be done properly, whatever that means. It did not seem to bother them that they would be paying off the bar mitzvah loan for years to come, as they did not fully comprehend the value of borrowed money.
In conclusion, no matter how much you save for an event, being prepared will save you money.
In 2017, the Government of Israel became aware that parents were behaving negligently in making financial provisions for their offspring. Therefore, the Government of Israel teamed up with Bituach Leumi (the National Insurance Institute) and introduced a compulsory savings scheme called Chisachon lecol Yeled = Savings scheme for every child. Under this plan, NIS 50 is deducted from the monthly Bituach Leumi child allowance. Parents were given the option of matching this amount; each parent then had a choice to either save in the bank or use an investment house. Since saving for children is usually long term, it is recommended taking advantage of high risk schemes. Research has shown that this is the most profitable way to leverage your money.
Even though Bituach Leumi has implemented a savings scheme for our little darlings, as parents we still need to take responsibility for them and not to rely solely on the State. Hila Weissberg, a financial writer and social affairs correspondent, researched an article for Globes comparing the different types of savings programs, with each one’s advantages and disadvantages.
This table is a simulation of some of the savings schemes available. The calculations are based on a monthly deposit of NIS 500 for 18 years.
|Annual Management fees||Estimated annual interest||End value before tax||Estimate amount for Capital Gains Tax||Estimated amount at the end of 18 years|
|Kupat Gemel Lemashki’im||0.64%||4%||147,460||6,443||141,017|
|Bank Index linked savings scheme||None||0.86%||116,810||1,343||116,810|
|Leaving the money in your checking acount||None||0%||108,000||–||108,000|
Kupat Gemel Lemashki’im – קופת גמל למשקיעים
This savings scheme has become very popular in the last couple of years due to its profitability. Another advantage is that you can choose whether you want a high or low risk kupah, ranging from 0% to 100% in shares. The maximum annual deposit is NIS 70,000, and as long as this is not exceeded, you can deposit any amount you wish, without predetermining the monthly amount. Therefore, if a child receives money as a birthday present it can be deposited in this kupah without any problem, something you cannot do with a normal savings scheme.
Advantages: As mentioned, your saving options vary from low to high risk. Another important factor is that management fees are relatively low compared with other schemes. In 2019, the average management fee was 0.6%. Another great advantage is that the fund can be moved between different companies and different tracks without paying a penalty or commission.
Disadvantage: The interest on the fund is not fixed.
Financial Policy – פוליסה פיננסית
This is very much like a Kupat Gemel Lemashki’im, but with two major differences. The first being that it is managed by an Insurance Company, and that at 0.8-1.2%, the management fees are higher. The second is that you are not limited to the amount that you can deposit on an annual basis.
Advantages: As mentioned, a wide range of saving options is available, from low to high risk. You know exactly how much you will be paying in management fees. The fund can be moved between different companies and different tracks without paying a penalty or commission.
For both Kupat Gemel LeMashki’im and the Financial Policy, I would suggest talking to an insurance agent specializing in investments. Take note that the banks and credit card companies might market these schemes in the future. Also Capital gains tax is deferred until the money is withdrawn.
Mutual Fund – קרן נאמנות
This is a fund or large portfolio in which many types of people invest together. The fund has a trustee, and every year is required to publish a forecast detailing its investment policy. You can either implement this scheme at the bank or deal directly through an investment company.
Advantage: The fund allows you to know exactly what the fund is investing in, a level of transparency not existing in the first two products mentioned in this article. This means you are able to invest in a more focused manner. The money is also easily liquidated.
Disadvantage. The commission and management fees are high, especially if the fund includes stocks and more so if the stocks are traded abroad. Also the return is not guaranteed.
Bank Savings Account – חיסכון בנקאי
This is recommended only for short term savings and for the very, very cautious. Interest is either guaranteed or link to the consumer index.
In some schemes you will be required to close the money for a few years and pay a penalty if you do wish to withdraw the funds earlier. The interest rate received is extremely low, generally up to 1% per year.
Advantage: No risk saving scheme and is suitable for very short term savings; I recommend one year or less.
Disadvantage: It is not really recommended as a long term savings scheme and of the all the products mentioned, yields the lowest result in leveraging your money.
Weissberg based her calculations on a monthly deposit of NIS 500 for 18 years. If you have 3 children this totals NIS 1,500 a month. Based on an average monthly income of NIS 16,145 for an Israeli family in 2018, NIS 1,500 per month is not realistic for most families. Parents can sometimes combine a savings scheme with grandparents in order to maximize the amount saved. However, the message is clear: no matter how much you decide you can allocate for savings, a scheme should be implemented. In the long run, it leverages your money. And remember, it saves money for that event you’re planning.
So, which scheme will you choose?
Suzy Kahati, Family Financial Advisor firstname.lastname@example.org
Article published in the Jerusalem Post 7.2.2021