BLOG: The most important ‘wrapper’ for children
In February, some friends of mine welcomed a long-awaited bundle of joy into their lives: Charlie. A bonnie baby boy weighing in at 7.3lb.
My own kids are all at school now and, over the past couple years – mainly thanks to my working more from home – my childcare costs have fallen.
But for many, the cost of raising a child is spiralling. Two major surveys recently have revealed that childcare costs have risen to unmanageable levels for many, with two-thirds of respondents saying they were paying as much or more for their childcare than for their rent or mortgage.
In total, the cost of raising a child during the first 18 years of their lives will now set you back a cool £161,000 for a couple and a staggering £194,000 for a single parent.
How to save when you are spending more
So, with such a huge financial commitment, it begs the question how families can possibly also think about saving money for their child’s future too – especially as the price of almost everything is rising at the moment.
But even a small amount of savings could make a huge difference. And Charlie’s mum and dad are in the fortunate position of being able to spare a small amount of money per month. So, our conversations (once we’ve covered lack of sleep and I’ve had sufficient cuddles) turn to what to invest this money in.
Investing in a Junior ISA
For me, the most useful ‘wrapper’ for children is a Junior ISA. Parents – or indeed anyone who wishes to do so like grandparents or family friends – can invest up to £9,000 a year and it is protected from income and capital gains tax.
The child can’t access the money until they are 18, at which point it could be used to help with university fees, driving lessons, or even rolled over into an adult ISA.
It’s also possible to invest in a pension for child, but they can’t access it until they are in their 50s, which is less helpful in terms of paying for big ticket items may need in their 30s or 40s.
Now, saving £9,000 a year for child is not an option for most parents, but saving £50 a month is a possibility. Based on a reasonable expectation that stock markets rise five per cent a year on average, this could equate to a nice pot of money worth more than £17,000 over 18 years.
And if you can’t afford to start saving immediately, you could always start once your weekly costs start to fall or your child goes to school. Once potty trained, you could save £5-8 a week on nappies, for example – that’s £20-£30 a month you could be investing.
Where to invest
Then comes the million-dollar question about what to invest this money in. With a timeframe of 10-18 years, you can afford to take a bit more risk with your money and, if you are investing for your small person, why not invest in smaller companies and watch them grow too?
Smaller companies are usually higher risk than larger ones as they are less well established. But they also have more growth potential. And, after stock markets have fallen in recent weeks, smaller companies are looking better value than their larger peers – in essence you can invest in them at a lower price than you could have done 12 months ago.
And, while investing in smaller companies can be a more volatile ride, by investing monthly, it can help smooth returns or at least help you sleep at night as you are investing little and often rather than seeing a lump sum change dramatically in value.
Funds that are worth considering in this space are TM Tellworth UK Smaller Companies or Unicorn UK Smaller Companies if you want to stay closer to home with your investments.
Those willing to look a bit further afield could look at Janus Henderson European Smaller Companies, T. Rowe Price US Smaller Companies, or Baillie Gifford Shin Nippon, which invests in Japanese smaller companies.
For those who prefer a more diversified approach, options would include ASI Global Smaller Companies, BMO Global Smaller Companies and Federated Hermes Global Emerging Markets SMID Equity.
Juliet Schooling Latter is research director at FundCalibre