University fees are expensive, houses are expensive, and care homes are expensive. Unless you want to cough up for education, have your child living with you indefinitely, or be stuck in the lowest rent care home, there is an incentive to get saving for their future.
There are three factors in making your child a millionaire – or, if perhaps not a millionaire, then at least wealthy enough for further education and independent living: time, investment growth and contributions.
Using each one to the maximum advantage is the best way to send them off into adult life equipped with a decent nest egg.
Time
This is your greatest advantage when investing for children. If you start young, compound interest will be a powerful force in building up a pot of cash. If you invest the full Junior ISA allowance each year for 18 years at 4.25% (the approximate level of a best buy cash ISA), you’ll be sending them off with a pot of £242,700. Start 10 years later, and that pot will be worth just £85,570.
Every pound you can invest when they are little will be worth infinitely more than when they are older. Also, there is the very real consideration that you will feel a lot more inclined to invest for their future when they are cute little babies than when they are ghastly ungrateful teenagers.
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Investment growth
A 4.25% interest rate feels high, and cash savings feel secure. However, you’ve got to bear in mind that inflation is currently running at 3%, so the real growth in that capital is lower. Another advantage of having time on your side is that you can take investment risk. You have plenty of time to ride out the highs and lows of financial markets and harness the higher long-term returns on offer.
If you raise the return on your £9,000 annual Junior ISA investment to 8%, say, your happy child might be looking at a pot of £360,000 at age 18. The annualised return of the MSCI World Index has been even higher – 10.4% over the past decade. That would have generated a pot of £471,550.
However, this return may have been flattered by the extraordinary performance of a handful of high-growth technology stocks. Active managers may be able to deliver a more balanced exposure from here, with less focus on the US.
For cautious investors, we might suggest something like the Jupiter Monthly Income Bond Fund. This has been a consistent performer under the stewardship of Hilary Blandy. It invests in investment grade and high-yield bonds, and is good for nervous investors who want a return above cash, but don’t want to feel every bump in the road with the equity market. It also has a chunky income stream, which you can choose to reinvest or take out, depending on need.
For those willing to take some equity risk, Ranmore Global Equity could be a good choice. This fund invests in companies of all sizes and incorporates momentum and technical factors into its process. This is a true global value fund with a bias towards mid- and small cap stocks, that has delivered strong performance in a range of market conditions. Unlike many global funds, its weighting in US companies is relatively small – at just 15%.
Another option would be the CCLA Better World Global Equity Fund. It’s always nice to think that investments you make for your children aren’t contributing to a dystopian hellscape in the future. This fund looks for companies with stringent environmental, social and governance standards and has a strong long-term track record.
Contributions
Children are expensive, and finding extra money to invest for their future is tough. Obviously, the more you put in, the better. The strongest argument in favour of finding that cash is that it will cost you more if you leave it later. You only have to be paying in £60 per month from birth to pay for your children’s university tuition fees, for example, as long as it grows at 7-8%.
The impact of this compounds over time. Imagine how much not having debt from tuition fees could save them in the longer term. Instead of paying back student loans, they can be saving for their future – or your care home fees.
A final note on tax: if you’re investing for the long term, the impact of tax on your overall returns becomes more important. It’s a no-brainer to save for your children in your own ISA (if you don’t trust them from age 18) or in a Junior ISA (where they can access the cash at 18), so long-term returns don’t get eaten up by capital gains or income tax.
Making your child a millionaire may be ambitious. However, there are non-altruistic reasons for building as large a pot as possible. Not least, you might just end up in the care home of your dreams.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
