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Money problems? I'm only 4!

Earlier this month I attended a two-day conference hosted by the Personal Finance Society (PFS), which is the main professional body for financial planners.

One of the talks explored the finances of young people in Birmingham. A group of individuals who looked to be in their mid-twenties were asked to share their thoughts about financial planning as a profession and whether they’ve done any financial planning themselves.

Their views were varied but a topic that kept cropping up was the property market. Many interviewees expressed concerns that they wouldn’t be able to buy their own home because although they could afford the repayments, the cost of rent makes it difficult to save a deposit. 

According to Rightmove, the average purchase price in Birmingham is now £257,000 and the average deposit in Birmingham is around £39,000. When you consider the average graduate salary is £32,000, it's easy to see why so many young people are struggling to buy. 

In 1980, the average UK house price was £20,268. By 2000, it was £89,595. Today, it’s a whopping £295,000. House prices are rising so quickly that no matter how hard young people save, they risk being repeatedly priced out of the market by growing demand.

If you’re the parent of young children, you might be wondering how on earth your little ones will ever be able to buy their own home. The secret? Good financial planning and time.

Time is on your child’s side

From the day my son Otto was born, I began saving for his first house. He might not appreciate the importance of good financial planning just yet, but he’ll appreciate my obsession with it when he gets the keys to his own place. 

My aim is to save enough for a 15% deposit in 2048, when he’ll be 30 years old. Assuming property prices grow at an average rate of 4% between now and then, he’ll need as much as £127,000 for a deposit. 

I could be six years into my retirement by then and it’s unlikely that I’ll have £127,000 sitting in cash for him to use.

So, by preparing for this problem many years in advance, I can make the most of the powerful effects of compounding. Just £120 a month for 30 years is all it takes at 7% per annum. 

Investing > saving

Investing your house deposit is rarely advisable. What happens if the market crashes when you’ve found your dream home and are ready to make an offer? 

If you’re investing for your child’s house deposit and they’re not going to be buying for another 10, 20 or 30 years, it’s a different story. 

As I explained in ‘why an investment JISA is the best place for your child’s savings’ earlier this year, a 2-year-old with hopes and dreams has no business having money in a cash JISA. Cash might seem like the safest bet, but inflation will only eat away at their long-term savings. 

If my son’s investment JISA gets an average return of 7% a year, however, he should have a little over £140,000 by the time he hits the big 3-0. He could put down a bigger deposit or use anything left over for solicitor fees, a good survey and furniture. 

Financial planning years in advance

This is one of the perks of financial planning. It gives you the ability to identify problems that individuals may not be aware of, decades in advance.

With the cost of living in general on the rise, many people are worrying about their present day finances ⁠— and rightly so. It’s important to live in the present, look after ourselves, and stay fit and healthy today. 

But as financial planners, we're used to seeing patterns and issues that often can only be saved when you have decades to prepare.

Putting your own oxygen mask on first

Research from Legal & General found that 17% of over 55s have endured a lower standard of living after helping their children to buy a house. 

Its research also found that roughly 14% of all housing transactions aided by ‘the Bank of Mum and Dad’ involved equity release. 

And more than three-quarters (77%) of those who gave money to help others onto the housing ladder didn’t seek financial advice first. They went into it not knowing how it’d impact their own financial future.

So although I’m a big believer that financially comfortable parents should help their children if they can, you’ve got to put your own oxygen mask on first. You need a good emergency fund, savings set aside for short-term goals, and a solid retirement plan. 

Buying your child a house when they’re 30 is a real achievement, but the last thing you need is to be moving in with them a year later. 

As a parent, you’ll do anything for your child. Not helping goes against our very nature. 

The list of things I want to do for my children is never ending. I can’t do it all and I can’t make their problems go away, but I can do my best. 

The earlier we identify the problems, the easier they are to solve, such is the magic of compounding. 

But we must also help ourselves first and ensure we have enough before we help others  ⁠—  however much we may love them!

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