BLOG: Investing for children – the New Zero
Expectations, meanwhile, have never been higher. Our recent research shows that almost all parents with children under 18 expect at least one of their offspring to pursue further education. Two-thirds of them intend to help with university fees and/or living expenses. Unfortunately higher education is expensive in the UK, with annual costs hitting £21,000.
Nor is it just the costs of university that parents face. Nearly half plan on providing support for their child’s wedding, 38% expect to help with a first home deposit and more besides. So what should parents do about this New Zero?
Firstly, they should seriously consider investing rather than just saving cash. This may seem daunting but, at current rates, interest on cash savings may not even cover inflation. Relatively few parents today are investing, despite the fact that stocks and shares traditionally offer the best long-term returns. We must all play our part in making it easy for savers to become investors.
Secondly, the earlier you start the better. This enables you to harness the power of compounding: each year your money will earn a return on the original amount plus the returns of earlier years.
To illustrate: if you put aside £50 every month after your child is born, and stuck it in a mattress, you would have £10,800 when they turn 18. The same amount earning 2% each year (e.g. in a cash ISA) would grow to £13,000. Stockmarket returns over the last 18 years have averaged about 7%. Of course, past performance isn’t a reliable guide to the future; markets can go down in value as well as up. Nevertheless, at that 7% rate, the same £50 a month would grow to over £21,000.
Einstein dubbed compounding the 8th Wonder of the World for good reason.
Thirdly, get into the habit of saving a little and often with a monthly savings plan. Not only does this make it easier to budget but it also means you smooth out any ups and downs in the stockmarket and average out the price paid for your investments.
Finally, Stocks and Shares ISAs and Junior ISAs are obvious options for younger kids. A JISA has the advantage of providing a specific pot for the kids’ future financial needs with the money locked up until they are 18.
Parents, and grandparents, may be daunted by the financial burden facing the next generation. But the most important thing for those who can and want to help, is to do something! Adopting good financial habits on their behalf now might even rub off on them in future, you never know…
Dan Brocklebank is director of online investment platform, Orbis Access.