Do you save or invest for your children? Starting young can mean that you can really take advantage of compounding, providing you put the money in the right kind of environment! Here is my thinking on this subject, and definitely something I will be doing with my own children when I eventually have them.
Saving vs. Investing
Before going in to detail, I want to first clarify the difference between saving and investing, because often these get confused, especially when adverts and banks refer to your retirement money as “savings” etc. They are VERY different entities!
Saving – this is reserved for spending. It comes in two broad categories:
- Saving to Spend
Money in this category is reserved for the stuff you want- holidays, cars, weddings, babies, laptops etc. You decide how much you need, and by which time, then you put a savings plan in place.
- Emergency Fund
This does exactly what it says – it saves your butt in an emergency. The first £1,000 of this fund is PURELY for unexpected things like your boiler breaking down or needing to replace a flat tyre like I did recently. As soon as you spend the money, you need to replenish it as quickly as possible.
The second part of the fund is to cover you for events such as maternity leave, losing your job, going off on sick leave, or telling your spouse or boss to fuck off. Trust me, you’ll be immensely grateful to have money like this set aside. Ideally, aim for 3-6 months of living expenses. Don’t touch it until needed, but it does need to be readily available at any time, so don’t tie any of this money up.
This is money you use to make more money with. This money is to be left alone at all costs. Ideally you will not need this money for 10 years or more. If you think you’ll need it sooner, then you need to be mindful about WHERE you put it (as in, DON’T put it into something too high risk, because you might lose a significant chunk of it right when you need it most).
Investing produces assets – and these come in different flavours.
- Stocks and Shares
- Commodities – gold, silver
- Other – watches, rare collectibles, art work, jewellery, cryptocurrency
The safest way to invest is to diversify (spread around) your money and put it into different asset classes. This doesn’t happen overnight, and I’m currently only investing regularly in a few of them. As I manage to release more money from my debts, I pass it over into investing, so I never really miss the money.
I’m not going to insult your intelligence by telling you where to save money for your child. Google will throw up loads of ideas, but here is a link from the Money Saving Expert. Look for the highest rate you can, and take advantage off all tax free allowances.
What I want to show you in this post is how to INVEST for your child.
How does this affect my child?
Children have the best advantage ever – better even than the money-savviest of adults.
They have time!
If you invest for a child, the money will compound to such a degree, that by the time they turn 18, you wouldn’t need to put in any more money, and it would STILL grow. This in the face of inflation, stock market dips and recessions.
Why is this?
Well, due to the fact that money compounds with time. If you have a credit card, and you don’t pay it off, what does it do? The amount you owe goes up right? This is how banks make their money – they are counting on you NOT paying off your card, so they can slap you with interest and make money on your money. Essentially they are using your credit card to make their own “money tree”.
If you want to produce a “money tree” for your children, you need to learn to invest.
The whole point of investing, is so that one day, this money will start producing an income for your child.
- This could be enough to put them through university without taking out a student loan (although BEWARE – read this post first before doing this).
- It could mean that they can buy their first house ridiculously easily because the investment compounds into a juicy deposit (and makes mortgage borrowing cheaper).
- It means YOU aren’t the one bailing them out when they finish uni at 21 and they have to come home.
Let me show you with numbers
Take a look at this picture.
Let’s say, you have £100 a month available and you want to start an INVESTING account for your child (more about this later). If you put this money into 4 different index trackers across the globe (at £25 each per month), that should be enough to aim for a return of around 8% per annum. If you continued to do this for 18 years, by the age of 18, your son/daughter will have £48,935 in the account (this is assuming that it grows at 8% ON AVERAGE). Some years it will grow less, and some years it will grow more.
POINT 1 – The more money you put in, the higher this amount will be at the age of 18.
POINT 2 – If you can find investments that increase the rate of return, the higher the final amount will be.
Now lets say, your daughter/son doesn’t want the money until they leave uni and want to buy a house with it, but first they want to rent for a while/travel etc. Leaving the money for a further 6 years WITHOUT putting in any more money, it grows to £77,654.
If they decide not to touch it until they get to age 60 because they don’t need a lump sum to buy a house, they will almost certainly be a millionaire.
And this is just at a rate of return of 8%. Some of the wealthiest investors are achieving WELL OVER that figure with a strong portfolio of a combination of investments. If we’re only aiming for 8%, then this is ENTIRELY DO-ABLE, but you need TIME.
Obviously there are no real guarantees in life (except death and taxes), so you’ll need to accept that some years the returns will not be as good as 8%. We’re looking at averages across a lifetime, NOT a given fixed figure.
You also don’t need to put in as much as £100 a month, some accounts allow £25 a month, so don’t feel put off if £100 is too much for you right now.
Where to put it
Investing accounts take many forms, but the specific ones for your children include:
You can open a pension for your child as soon as they are born. According to the HMRC – 60,000 children in the UK have a pension plan! The money is tied up until they turn 57 – so if you remember my example above, you’ll recall that this will almost make them a millionaire providing the money is invested and it earns on average 8% per year. Leave the money until they turn 60, and they have a very good chance of being a millionaire.
There will be limitations on how much money they are allowed to have in a pension (the UK currently has a lifetime limit of £1m which may change), but hopefully, with your education, you’ll be able to teach them about other places they could put their savings and investments! Or, just seek help from a tax-adviser/financial planner.
Junior Investment ISAs
Lots of companies offer junior investment ISAs. Hargreaves Lansdown is one example of a broker who does this, and you can also put your own investments in the same account which can make life much easier for you.
Your child has £9,000 in 2022/2023 as a tax free allowance, so you could aim to save up to this (which is more than my example of £100 per month).
You just need to make sure that you DIVERSIFY your investments. Either, pick a ready made-portfolio (something the broker has already created), or aim for 4-8 low cost funds to diversify your risk across countries and sectors. If you’re confused about this and don’t know where to start, download my investing freebie.
When your child turns 18, the ISA becomes an adult ISA, and the allowance goes up per year for ongoing investing or saving (£20,000 in 2022/23).
The money you save into a junior ISA is completely locked away until your child turns 18, because as soon as it is saved into their name, its their money. So that means they get full access when they turn 18.
LISA – The Lifetime ISA
A LISA is a way to save for a first property (from the age of 18), and more information on this can be found here. Essentially, it uses £4,000 of the overall adult ISA allowance, and the government tops up whatever is saved or invested by 25%. Unfortunately there aren’t many cash LISAs, but there are plenty of investment ISAs. Be careful about investing money that will be used within 5-10 years because there’s a risk that it could lose value right at the stage that it is needed.
In addition to this, if your child would like to start a LISA but all the money is currently tied up in a standard ISA, make sure that a proper transfer is done between the ISA and the LISA. Don’t withdraw the money because it then loses it’s tax protection. The broker you use can help you with this and it’s usually a simple form that needs to be filled out.
Phew! That’s it – its a long post, but then there are lots of options open to your child. This is something I’m really passionate about, particularly for little girls. Did you know that the pension gap actually starts from birth, not from adult age?! Crazy right?!! It just shows the still ongoing subconscious bias there is in society, but if we’re going to be within any chance of correcting the pension gap, we need to start pensions off way before we even get to working age.
If you have kids and can afford to set aside £25-£100 a month, then I think it’s worth doing.
What do you think? Let me know in the comments!
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