Why should you invest in your child’s future?

Why should you invest in your child’s future?

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It starts with nappies and bibs, and before you know it, they’re asking for their first car and some help with living costs at university. Having children is a wonderful thing, but it can require a lot of planning ahead, especially on the financial side. If you’re in a position where you’re able to put money aside for your child, make sure you take the route that has the most to offer. Here’s why investing could be a good option to help build your child’s financial future.

 

Why should you start investing for your child?
If you want to give your child a head-start in life, it’s important to start putting money aside, and we’re not just talking about saving here. Tucking money away in a savings account or Cash ISA (childrens ISA) for your child is a sensible thing to do as it guarantees future income, but it may not the most suitable option if you’re looking for long-term growth. In fact, by solely saving, you could be undermining the financial future of your child without even realising it. How so, you ask? When you put money in a savings account, you earn interest, and your money typically grows at the rate your bank is paying you. But every time the interest rate you earn goes below the rate of inflation, the value of your child’s savings will automatically fall. In other words, your child’s money could be growing at a slower pace than everything else, and they could be losing some purchasing power.

If you want to give your child’s savings a chance to grow, consider investing in the stock market. Over the long-term, investing has almost always outperformed cash. Indeed, since 1899, British stocks have returned an average 4.9% a year, against 0.7% for cash1. Needless to say, investing could give a real boost to your child’s financial future, especially if you’re entering the investment world whilst they’re still young. Typically, the sooner you start investing for your child, the longer their money has to grow and compound. We talk about compounding when any money made on top of your original investment is invested back and generates more money. Put simply, your child’s money could be piling up and just like a snowball rolling down a hill, their pot could become exponentially larger in the long run. If you want to take advantage of compounding for your child, it could be a good idea to get going as soon as you possibly can.

Let’s say you decide to put £2,000 for your child in a Junior Stocks and Shares ISA. If you make the investment on your child’s fifth birthday, they could end up with £3,011 when they turn 182. But if you invest soon after they are born, your child could celebrate their 18th birthday with £3,5863. By delaying their investment journey, your child could miss out on potential growth - so since time is on your side, make sure you start sooner rather than later. And remember, you don’t need to invest big lump sums. Investing whatever you can afford on a monthly basis could help you build them a decent nest egg. For instance, if you open a Junior Stocks and Shares ISA just after they’re born and invest £150 every month, your child could end up with a pot worth £44,818 on their 18th birthday – enough to help them with living costs at university.

 

What’s the best way to invest for your child?
When it comes to investing for your child, there are many routes you could take. You could, for example, do it yourself and pick investments on their behalf via a DIY investment platform. However, if you’re too busy or don’t feel confident enough to do the investing on your own, you could opt for a robo-investing service, like Wealthify, where the hard work is done for you. All you need to do is download the app, choose how much to invest, along with the risk level that suits you and your child.

Typically, digital investment services will offer many types of investment plans, but if you’re looking to put your child’s money to work, then opening a Junior Stocks and Shares ISA could be a suitable choice. Just like a Stocks and Shares ISA, a Junior Stocks and Shares ISA lets you invest tax-efficiently. In other words, every tax year, you can invest up to £4,368 (subject to change) and your child won’t need to pay UK tax on any returns they make - that way they get to keep more of their money.

Unlike an adult ISA, where you can open a new one every tax year, your child can only have one Junior Stocks and Shares ISA and one Junior Cash ISA open throughout their entire childhood, and everything you put in is locked away, meaning nobody can dip into their savings. The money belongs to your child and they gain full control over their pot once they turn 18. At the same time, their Junior Stocks and Shares ISA will automatically turn into an adult ISA, and your child will be free to choose what to do with the money - whether it’s using it to buy a house or keeping it tucked away in the hope it’ll grow further.

 

1: https://moneyweek.com/505257/stocks-beat-cash-and-bonds-over-the-long-term/

2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £1,981. If markets perform better, your return could be £4,356. Values correct as of 07/10/19.

3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £2,235. If markets perform better, your return could be £5,494. Values correct as of 07/10/19.

4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £34,892. If markets perform better, your return could be £57,154. Values correct as of 07/10/19.

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

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

 

 

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