BLOG: Tips on building a nest egg for your children
We were recently asked to comment on an investor’s plans to build a nest egg for his children. A colleague ran some numbers for me, outlining different scenarios, and I have to admit, it peaked my own interest: how can I get my own children on track to having a good financial start to their adulthood?
So I thought I’d share my findings.
The hardest part of investing for children is probably finding the spare cash in the first place. After we’ve paid the bills, the rent or mortgage, and saved for our own futures, there is often not a lot left over.
But the good news is that even a small amount invested each month can have a significant impact. And the earlier you start saving, the better.
For example, if you invested £25 a month for a child starting when they were born and assuming 4% annual returns after fees and inflation, you could have a pot of money worth almost £10,000 (£9,765.35 to be exact) by the time the child turned 21*.
If you haven’t already started saving and have a child that has already three years old, £25 a month starting today would still give a pot of money worth £7,833.67 at age 21*. Not as much, as you haven’t had as long to enjoy the wonder that is ‘compounding’ (earning interest on your interest), but definitely better than nothing.
Saving for university fees or a house deposit
If you have a little more money to spare, then you can set yourself a larger goal – such as building a pot of money large enough to pay off university fees or to cover a house deposit.
Let’s take a goal of £30,000 for example, which would cover one of these aims. I have three year old twins and a five year old. My colleague has a seven and a ten year old. Each has a varying amount already invested for them but not huge amounts.
So let’s use them as real-life examples.
|Age||Current savings||Estimated monthly savings to achieve £30,000 at age 21||Number of months investing|
As you can see from the table above, again, the earlier you start saving the better. Assuming a real return of 4% (6% after fees but allowing 2% for inflation), my colleague would have to invest a total of £243 a month for her children and I’d need to invest £291 for my three. It’s a decent amount to find, but not unachievable.
Where should you invest?
The low risk and more consistent option is cash – but with interest rates nearer to zero than 4%, once you factor in inflation, the purchasing power of your savings are actually being eroded. So that really isn’t an option today.
But with time on your side – up to 21 years in some cases – equities, although riskier, also offer potentially higher rewards. Obviously returns each year won’t be this uniform in reality – they will be higher and lower and, in some years, could fall in value. But there are some good funds out there that should be more than capable of achieving similar or even greater returns on average over time.
Funds such as Premier Miton Global Smaller Companies or Brown Advisory Global Leaders are worth a look for those wanting a broad, catch-all fund. If you prefer emerging markets, Magna Emerging Markets Dividend and GQG Partners Emerging Markets Equity could be considered.
Avoid paying tax on your gains
Having decided how much and where to invest, how to invest is the next question. Here, a Junior ISA is really a no-brainer. It is a tax-efficient wrapper that allows anyone invest on behalf of a child. So if you can’t afford to invest the amount required yourself, perhaps the grandparents could help you achieve your goals.
Junior ISAs must be opened by a parent or guardian but are held in the child’s name. The money cannot be accessed by anyone until the child’s 18th birthday.
At this point, the last thing you may want is for your child to blow the pot of money on a holiday or just ‘stuff’. So, over time, it’s important to teach children the value of money – helping them to make smart decisions as to how they spend it and how they too, save it.
One way of doing is this is, as the child gets older, to involve them in their investments – maybe choosing the fund in which to invest, for example. If you can find an option that fits with their interests it helps.
AXA Framlington Global technology or Sanlam Artificial Intelligence funds spring to mind as they invest in the gadgets and themes our children grow up with. Ninety One Global Environment or ASI UK Ethical Equity are other options for those concerned about environmental, social and governance issues.
Whatever you decide, just decide to invest. In today’s world, some financial security can go a long way.
Juliet Schooling Latter is research director at FundCalibre
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.