As my twins turn six, and I contemplate the eye-watering expense of a party for 30 of their classmates, plus the overwhelming weight of generous presents from assorted relatives and godparents, I wonder whether there might be a better way.
What if there was a way to re-route all the cash sprinkled on plastic toys and fancy parties into something useful and long term that they might actually thank us for in the end?
Before you protest, I’m in no way suggesting that we should cancel birthday parties for the sake of our children’s long-term wealth. That would seem needlessly cruel. But it is worth looking at how that money could be better spent were it to be channelled effectively into the right long-term savings.
For example, what if you spent £200 rather than £400 on a child’s birthday party? (The £400 is an unscientific figure taken from Mumsnet and my own experience). My youngest children have just turned six, and my oldest is eight. That’s 22 birthday parties at a saving of £200 per birthday – £4,400.
Then there are all the birthday gifts. If your child receives 30 presents, the chances are that they will play with two of them. This makes the case for ruthless re-gifting. The gains could be significant.
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Assuming a class of 30 and £10 per child, that’s perhaps £250 saved per year. In this respect, having twins that are in the same class may be an advantage (though the financial advantages are otherwise few and far between!). So, roughly, over their lives so far, that’s £1,800 for the twins and £3,400 for my older daughter.
Equally, I’m sure I’m not the only person who has watched their children ripping through Christmas presents with unease. Grandparents can be terribly competitive. What if we could encourage them to put half of what they were going to spend on presents into savings or investments? I’m pretty sure the children will be none the wiser.
Re-packaging and re-investing
The gains could be significant. If you invested those savings, they could achieve some great things for your children’s future. If I’d invested the £1,200 or so I’d saved on parties and gifts into a plain old MSCI World tracker over the past five years, I’d now be sitting on a pot of £8,450 (source: MSCI index factsheet).
More importantly, if I kept doing that until they were 18, assuming the long-term growth rate for the MSCI World index (8.45%), I’d have a tidy little pot of over £53,000. All that from just £100 per month and with far fewer plastic toys around the house.
Equally, you don’t have to keep it in a tracker. Recently, index funds have done well because they tend to have high weightings in the US technology giants, which have gone from strength to strength. However, while Nvidia, Apple or Microsoft are still great companies, there are more questions being asked about their high share prices and their success may not continue indefinitely.
With this in mind, it can be worth considering an active fund where the fund manager can pick and choose where they invest. There are some great fund managers who have delivered strong performance year after year.
If you are investing for your children, you can afford to take more investment risk than you might otherwise because you have plenty of time to ride out the ups and downs of stock markets. Too often, families are very cautious with their children’s savings, which stymie their growth and leave them exposed to inflation.
A good starting point would be a global fund. This will give you a diversified portfolio of companies from around the world. The Rathbone Global Opportunities fund invests in innovative companies, aiming to catch them at an early stage in their development. Among its top holdings are QuickBook maker Intuit, shopping giant Costco and cable company Amphenol (source: fund factsheet).
Another option might be the IFSL Evenlode Global Income fund. Run by Ben Peters, this focuses on more defensive areas, such as consumer staples and healthcare, while avoiding volatile areas such as financials, basic materials and energy. The fund pays a dividend of 2.2%. This may sound low, but Peters aims to grow this dividend over time, which gives investors some protection against inflation.
Investing through a Junior ISA makes sense. These come with all the usual advantages of an adult ISA – any income or capital gains generated on funds held in the ISA is tax-free. You can put in up to £9,000 per year. It is worth noting that the child can take control of the account when they’re 16, but cannot withdraw the money until they turn 18.
To my mind, re-directing some of the money from birthdays and presents is a win-win. It is an easy way to establish a nest egg for your children, without compromising your own long-term savings plans.
It is also a handy way to prevent your house being overwhelmed with plastic toys. Ultimately, they may thank you more for the cash to help them through university than for the magnificent party they had when they were six. At least, that’s what I’m telling my twins this year.
Juliet Schooling Latter is the research director of FundCalibre and Chelsea Financial Services
