The Independent reports that 76% of parents and guardians in the UK are saving money for their children under the age of 18. Helping your child step into adult life with some savings could prove vital for their mental wellbeing and financial stability and could help them further down the line.
But, of those saving, 83% do so exclusively in cash. While perhaps the easiest and simplest option, it may not be the best way to generate a nest egg for your child. In an environment of low interest rates and rising living costs, the cash you have saved now will likely not have the same value in 5-, 10-, or 15-years’ time.
One alternative to saving in cash is to invest your money. Making an investment may seem daunting, but it could prove to be the most efficient way to save for the future. Read on to find out why investing your money might be the best way to save for your children.
Inflation reduces the value of cash over time
The purchasing power of your savings will reduce over time thanks to inflation. Inflation represents the average rise in the prices of goods and services and stands at 2.5% as of June 2021 when compared to a year earlier. Simply put, something that cost £100 in June 2020 cost £102.50 in June 2021.
If the money you are saving for your child is kept in a savings account, you may gain a little interest on the amount, but it’s unlikely to keep up with inflation.
As of the start of August 2021, Moneyfacts states that the junior savings account with the highest interest rate pays an Annual Equivalent Rate (AER) of 3%. This is the only account that pays a rate that beats the rate of inflation. If your money is in any other account, it’s likely losing money in real terms.
Saving for your children is a long-term project as you’re likely to be putting money aside for 10 years or more. Because of this, it could be worth investing your money for better returns.
Investing could provide higher returns than savings accounts, but it isn’t without risk
As interest rates are so low, if you’re setting money aside for a period of five years or more, it could pay to invest the cash instead.
Online investment manager Nutmeg looked at available market data between January 1971 and May 2020 and found that long-term investing dramatically increases your chances of returns.
For example, investing for one day during that period gives an investor a 52% chance of generating a profit, but investing for 10 years raises this to 94%.
And the longer you’re invested, the better. Nutmeg found that “an investor that invested in the stock market for more than 13 and a half years at any point between January 1971 and May 2020 never lost money.”
In a 2020 blog, Financial Expert reported that if you had put £1,000 in a 2% interest savings account in 2010, that money would have been worth £1,148 in 2020. However, if you had invested £1,000 in the FTSE 100 in 2010, that money would have been worth roughly £1,579 in 2020.
However, returns cannot be guaranteed, and all investments carry some level of risk. Investment values can fall as well as rise. It’s important to weigh up the risks when making investment decisions. If you have any questions, we’re here to help.
A Stocks and Shares Junior ISA is a tax-efficient, hassle-free investment opportunity
There are a few ways to go about investing for your children. One of the most tax-efficient methods is through a Stocks and Shares Junior ISA (JISA), where you don’t pay Income Tax or Capital Gain Tax on your returns. When you contribute to a Stocks and Shares JISA, your money is typically invested in a range of assets across the globe, from shares to government bonds.
You can contribute up to £9,000 into a JISA in the 2021/22 tax year. Remember that the money cannot be accessed before your child turns 18 and your returns will be based on the performance of the underlying investments.
Research from Schroders, published by City AM, show that saving money into a Cash ISA between 2000 and 2018 returned four times less than a Stocks and Shares ISA. However, remember that the past performance of an investment is not necessarily indicative of the future.
Investing could help you build up a bigger nest egg for your child
If you’d like to see the money you’ve worked hard to save for your child increase faster than the rate of inflation, saving in cash may not be the best idea. Though riskier, investing your money may generate higher returns.
While it is important to remember that the past performance of a stock is not indicative of the future, stock market investments tend to outperform cash savings accounts in the long term.
The method of saving that you choose should be personal to you depending on your situation, so be sure to contact us and speak to a financial adviser when weighing up your options. We can help plan for you and your children and come to a decision on the best course of action for your situation.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.