BySUZY KAHATI

We all want our children and grandchildren to get good starts in life. This article will lay out the various ways to save for their futures and willl explain the advantages and disadvantages of each.

As an active member of the Israeli Union of Family Financial Advisors’ research committee, I helped study the advantages of saving for a child’s bar or bat mitzvah. We compared families who saved for the bar/bat mitzvah with those who didn’t and decided to take out a loan. A loan costs money; this means the bar/bat mitzvah costs more because of the interest on the loan. People who saved avoided compound interest (interest on interest) over the course of 13 years.

To illustrate, let’s assume that the bar/bat mitzvah costs NIS 20,000. If you saved NIS 16,000 and earned NIS 4,000 interest on the savings, the bar mitzvah only cost you NIS 16,000. However, if you took out an NIS 20,000 loan and paid another NIS 4,000 in interest, the cost was actually NIS 24,000. That’s a difference of NIS 8,000.

Our study also showed that people who saved for a bar/bat mitzvah rarely went over budget. These families understood that if they knew what they could afford, they would allocate the funds accordingly. Those who took out a loan, on the other hand, often went over budget, paying off their debt for years, as they did not fully comprehend the true cost of borrowed money.

No matter how much you save for an event, being prepared will save you money.

In 2017, the government of Israel teamed up with the National Insurance Institute (NII, or bituah leumi) and introduced a compulsory savings plan called Hisachon lekol Yeled (Savings for every child). Under this plan, NIS 50 is deducted from every month’s NII child allowance. Parents are given the option of matching this amount, either in a bank or with an investment house.

Even though the NII has implemented a savings scheme, we still need to take responsibility for our little darlings and not rely solely on the state.

Hila Weissberg, a financial writer and social affairs correspondent, compared the different types of savings programs for an article she wrote in Globes.

The table below simulates some of the savings schemes available. The calculations are based on a monthly deposit of NIS 500 for 18 years.

Kupat Gemel Lemashki’im 
This savings scheme has become very popular in recent years. One advantage is that you can choose the percentage of money you want to invest in a range of high- or low-risk investments. As long as you don’t exceed the maximum annual deposit of NIS 70,000, you can deposit any amount you wish, without predetermining the monthly amount, something you cannot do with most savings schemes.
 

Advantages: Your saving options vary according to risk-tolerance, and management fees are relatively low. 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 
This is very much like a Kupat Gemel Lemashki’im, but with two major differences: First, it is managed by an insurance company with management fees of 0.8%-1.2%. Second, there is no limit on the amount that you can deposit annually.
 
Advantages: There are a wide range of saving options available, from low- to high-risk. You know exactly how much you will be paying in management fees, and funds can be moved between different companies and investment tracks without penalty or commission.
 
For both Kupat Gemel LeMashki’im and the financial policy, I suggest talking to an insurance agent who specializes in investments. 

Banks and credit card companies might someday market these schemes, in which capital gains tax is deferred until the money is withdrawn.

Mutual fund 
A mutual fund is a large portfolio of investments in which many people invest together. The fund has a trustee, and every year is required to publish a forecast detailing its investment policy. You can implement this scheme either at your 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 above. This means you are able to invest in a more focused manner. The money is also easily liquidated.

Disadvantage. Commissions and management fees can be high, especially if the fund includes stocks, and more so if the stocks are traded abroad. The return is also not guaranteed.

Bank savings account
This is recommended only for short-term savings and for very, very cautious investors. Interest is either guaranteed or linked to the consumer price index.
 
In some schemes you will be required to leave the money untouched for a few years or pay a penalty if you withdraw the funds earlier. The interest rates are extremely low, generally no more than 1% per year.
 

Advantage: This is a virtually zero-risk savings scheme suitable for very short-term savings. I recommend one year or less.

Disadvantage: Bank savings accounts are not really recommended for the long term. Of the all the products mentioned, these yield the lowest returns.

FINANCIAL WRITER Weissberg based her calculations on a monthly deposit of NIS 500 per month per child for 18 years. Based on an average monthly income of NIS 16,145 for an Israeli family in 2018, NIS 1,500 per month for a family with three children is not realistic. Parents can sometimes combine a savings scheme with investments made by grandparents in order to maximize the amount saved.
 

However, the message is clear: No matter how much you decide you can allocate for savings, implement a plan. In the long run you will get more for your money.

suzy.kahati@gmail.com