Parents should start saving early for their kids’ futures to take advantage of compound growth

Why parents should start saving now for their kids’ futures

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Having kids is no cheap undertaking – just ask any parent. Prams, clothes, nappies, milk formula, bouncers, changing mats and an endless array of other weird and wonderful contraptions marketed to doting parents can cost the earth. Then, there’s crèche fees whose monthly payments can feel like a second mortgage. After all of that, there’s barely anything left in the coffers to start a savings pot for the kids.

 

It’s perhaps not surprising then, that almost half of parents (46%) admit to not have started saving for their kids at all1.

 

Not that there seems to be much incentive to save these days. With interest rates at a historic low and inflation soaring, many people feel that it’s better to spend their cash and bury their heads in the sand as far as future financial planning is concerned. Investing can offer higher returns and with an increasing number of companies now offering affordable investment services, it’s arguably more accessible than ever, if a little riskier than cash savings. Think long-term, however, and according to the Barclays Equity Gilt survey, the odds of your investments outperforming the return on cash savings are fairly palatable: with a 90% chance of being better off after 10 years and 99% after 18 years2.

 

Coincidentally, 18 is an ideal number of years to invest for a lump sum for the kids and the perfect age to hand it to them.

 

Start with a £250 pot and pay £50/m into a medium risk investment plan, and you could hand your kids around £19,000 on their 18th birthday. If you’re able to put £100/m aside, you could hand them as much as £38,000, which will go a long way towards a house deposit or university fees3. Many parents may be tempted to delay saving, particularly if they’re feeling financially stretched at the start, but it can prove to be a false economy in the long-run. Wait until the kids are ten years old to start saving, for example, and parents will need to find around £310/m to hit a £38,000 saving target by the kids’ 18th birthday.

 

Stick to cash savings and you’ll need to work even harder. At today’s best high street cash4 savings introductory rate of 1.1%, a parent depositing £250 into an account and saving £100 per month will only have around £24,000 to hand to the kids on their 18th, assuming, that is, that they retain their introductory savings rate for the full 18-year term. Given today’s interest rates, that’s unlikely. More likely is that after a year, the rate would drop dramatically, to around 0.01%. At that rate, the kids will need to wait until almost their 50th birthday to reach a £38,000 target5.

 

Starting early is therefore one of the most effective things savers and investors can do to ensure long-term growth, thanks to the impressive power of compound interest.

 

So, even if saving just £20 a month towards your kids’ future seems like a futile exercise at first, think about how that small pot will grow with a little bit of patience and perseverance. Remember, you can always increase your monthly contributions later on, when there’s more cash to spare each month and you can top it up with the kids’ birthday or Christmas money, if you can persuade them not to spend it. Above all, no matter how tight the monthly budget gets, keep saving what you can, however little, and don’t be tempted to take a break, unless you really have to. You’ll be amazed what a difference it will make. And if you use an investment service that gives you online access to your account to check your investment performance, involve the kids in the process and take the opportunity to teach them about saving and investing, it will encourage good financial management habits and set them in good stead for the rest of their lives!

 

Please remember that the value of your investments can go down as well as up and you can get back less than invested.

1 Almost half of parents admit to taking money from their children’s savings – and 51 per cent do not even feel guilty about it. Mail Online, 7 May 2013: http://www.dailymail.co.uk/femail/article-2320857/Almost-HALF-parents-admit-taking-money-childrens-savings--51per-cent-feel-guilty-it.html

 

2 Barclays Equity Gilt Study 2016 http://hungrydummy.com/media/pdf/EquityGiltStudy2016.pdf

 

3 Predicted value of £19,601 based on an account opened with £250 and paying in 50/m investing for 18 years on a medium risk (Confident) profile. £38,497 is based on an account opened with £250 and paying in 100/m investing for 18 years on a medium risk (Confident) profile. The predicted value is an indication of what your money could be worth at the end of the timeframe selected after all management fees have been taken. Predictions calculated using ARC benchmark data. Past performance is not an indicator of future growth and with investing you could get back less than you put in.

 

4 best savings rate for an easy access cash savings account as at 21/11/2016: www.moneyfacts.co.uk

 

5 Calculations made using Money Advice Service’s savings calculator https://www.moneyadviceservice.org.uk/en/tools/savings-calculator

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