And while it seems cruel to mention finances at one of the peak poverty moments of the year, that could include a little long-term planning for the future financial health of your children. At the very least, forward planning can ensure that they leave home at some point.
It is no secret that children are expensive. Government support has been progressively eroded, education costs have risen and day-to-day household expenses have ballooned over the past two years. At the same time, the next generation is likely to face a tougher economic environment, with Government finances stretched, an impossibly expensive housing market and higher debt. Some of these costs will probably fall on you.
If you would rather your children weren’t part of the so-called boomerang generation, who continue living at home for years and years because they can’t afford to leave, a little launchpad capital might get them started. This could be for university fees or other types of training, or it could just be enough to pay a deposit on a rental place and fly the nest. Whatever they use it for, it will be far less of a drain on your household finances if you start now than if you start when they are older.
Here’s the maths bit: £300 invested every month from when they are five, growing at a rate of 6%, gives a pot of over £70,000 by the time they are 18. To achieve that size of pot starting at 13, you’d need to be putting aside over £1,000 per month. With the first approach, your cost is £46,800; with the second, it is £60,000.
There are a few rules when building up a ‘launch’ fund for your children. The first is that it should grow free of tax. That means saving into an ISA or a Junior ISA (JISA), where all income and capital gains generated by the underlying investments will be free of tax. The choice of which to use will largely depend on whether you are already using your full ISA allowance for your own savings or not.
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You can currently put £20,000 in an ISA and £9,000 in a JISA each year. Both offer plenty of flexibility and low costs. The chief drawback with a JISA is that it becomes the property of the child at age 18. Theoretically, they can do what they like with it, and it will provide an effective means to fund them through their university years – after all, they will have the responsibility of paying rent and tuition fees themselves anyway.
However, there will be parents who would rather keep it more tightly controlled. This also means that if the child doesn’t go to university and insists on hanging around at home, you can at least use the money for a spa trip to the Caribbean instead (you will definitely have earned it). If you have spare capacity in your own ISA, this might be a better option.
But where to invest?
The biggest mistake most parents make is to be too cautious. They will stick it in a cash ISA paying 2-3% per year. That leaves them vulnerable to the ravages of inflation and means they won’t get the full benefits from compounding. If you have 10 years or more to invest, and you’re investing regularly rather than investing a lump sum, the stock market is likely to be the right option.
That said, you can take it too far. I’m not sure I’d bet my children’s future on a risky strategy such as a niche technology fund or emerging markets. A good global fund should do the job. It will be diversified, provide exposure to the world’s strongest companies and be spread across a range of geographic regions.
For those willing to take some risk, a fund such as Guinness Global Innovators may be a good choice. It invests in companies with a track record of innovation and a strong pathway of growth. Rathbone Global Opportunities is another option. It aims to invest in undiscovered, out-of-favour growth companies and hold them for the long term. WS Montanaro Global Select is also looking for high-growth companies, but with a bias to small and mid-cap stocks.
For those who are a bit more cautious, adding an income overlay can give a smoother ride. Fidelity Global Dividend or JPM Global Equity Income are good options. Alternatively, a balanced fund will bring in some bond exposure to reduce the risk a little – WS Canlife Diversified Monthly Income or Aegon Diversified Monthly Income are possibilities here.
As you re-embrace your leisure time after the summer holidays, it is worth devoting a little time to long-term financial planning for your children. That way, you can ensure that they may finally have to learn to do their own washing at some point in the future.
Juliet Schooling Latter, research director at Chelsea Financial Services and FundCalibre
