According to a study from NatWest, more than four fifths of parents who are saving money for their children are doing so exclusively in cash, rather than investing.
It’s admirable that so many people are saving for their child’s future, but as I tweeted last week, a two-year-old with hopes and dreams has no business being in a cash JISA.
It’s better than nothing, yes, but at the same time it feels like such a waste when we consider the growth potential of investment JISAs along with the destruction that inflation can cause on cash.
With living costs increasing at a much faster rate than the average savings account offers in interest, there are smarter ways to prepare for a child’s future. Enter… the junior investment ISA.
Avoiding the perils of inflation
Keeping money in cash can seem like the safest bet, particularly for those who are risk averse.
If the thought of losing your child’s savings fills you with dread, it can be tempting to open a friendly savings account and squirrel money into it each month.
In a sense, this strategy can actually be riskier than investing. Thanks to inflation, the money you’re putting away now is unlikely to be worth anywhere near as much in future.
As I wrote back in November, I always think of inflation like buying a pint in the pub, only for the barman to pour some of it out before handing it to you. Or like opening a bag of pork scratchings and quickly dropping a handful of them on the floor.
If you’re putting money in savings for use long into the future, you may as well throw some of it away. Don’t actually do that, because then you’ll have even less. But hopefully you can see what I mean. It will lose its value.
Children have one of the greatest advantages… time
Contrary to popular belief, investment success has nothing to do with how clever you are.
And you certainly don’t need to send your child on some kind of online investing course held by someone who makes more money from teaching others how to invest than they make from actually investing.
Time is far more important than wisdom or experience - and children are blessed with plenty of it.
Warren Buffet made his first investment aged 10, yet 94% of his wealth came after his 65th birthday. Do you know who has an advantage over him? Your baby!
Okay, we’re not saying your child is going to become a billionaire like Buffet, but the example below is a testament to the power of compound interest.
If you invest £250 a month for your child from the day they’re born up until they’re 18, they could enter adulthood with a whopping £107,680.26 if their investments were to generate an average of 7% each year.
Whereas if you saved the same amount in a cash ISA offering 0.25% interest, your child would have just £55,227.55 once they’re old enough to buy a pint in the pub.
What’s even more encouraging is the fact that there are periods where the average return was much higher than 7%.
The last 18 years, for example, have been extremely rewarding for investors - even if we might currently be experiencing a stock market correction.
The 18 years before that were generous too.
Past performance does not guarantee future results, but it’s not entirely unreasonable to assume that stock market investments will continue to outperform savings in the long term.
The results can be life changing
By investing in your child from a young age, you could build an account large enough to put down a substantial house deposit, fund a gap year, pay for 101 driving lessons, or even help them to retire early.
When they’re taking those first tentative steps into the world of work, they won’t have to worry about setting aside a huge portion of their income for retirement, although it’s still probably worth making the most of employer contributions.
You could potentially save enough for their university tuition fees.
The bottom line is, whatever your child decides to use the money for, the results can be potentially life changing.
Invest sooner rather than later
You can offer yourself some protection from stock market pullbacks by investing sooner rather than later.
If you’ve been regularly investing money for 15 years, a 10% or even 15% decline in the investments’ value will be frustrating, but not devastating.
You’ll still have achieved a large amount of growth that would never have happened had you put the money in cash.
Make the most of the annual ISA allowance
The Junior ISA limit is £9,000 for the 2021/2022 tax year and with the year ending in April, there’s still time to make use of this year’s allowance.
If you’ve already been saving for your child’s future in cash, this could be a good opportunity to max out a junior investment ISA using some of your savings.
Come the new tax year in April, you’ll be able to start investing once more. And the best bit? We apply no advice fees to the children of clients until they reach 23 or £100,000. Giving them the best possible start in life.
Give me a ring if you’d like to chat any of this through.
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