5 tips to save for your child's future without a lot of money
Financial education is now on the national curriculum for 5-16-year-olds in maintained schools in England. Beyond teaching them the lessons though, a great boost for their future will be a fund created on their behalf by their parents. This can be for any number of things, including a house deposit or student loans, or even a retirement fund.
The purpose of these funds is to accumulate over a long time - if the child receives the money at 18 it will have been growing for almost two decades - which means that there is enough time for small sums to grow into a large fund given a good growth rate. Here are five tips for building a sizeable fund for your child, without breaking the bank (the following is not intended to be financial advice):
The younger the child when you begin saving, the more time there is for compound interest to work its magic. Money Advice Service explains how effective compound interest is with the example that with 6% growth, saving £100 a month for 40 years would provide £190,000, but saving £200 a month for 20 years would provide only £90,000. Since 1918, the UK stock market has seen long-term returns of about 11% per annum - almost double the interest in MAS's example. At 11%, putting just £25 a month into a tracker fund when your child is born would give them £24,000 when they turn 21, and only cost you £6,300. If you then hand it over to your child and they leave it accruing at the same rate until they turn 60, it will be worth £1.4 million.
Consider the merits of different funds
There are a number of different accounts on the market, and rates can vary a lot between them so it's important to shop around before making a decision.
Junior ISAs are one of the obvious choices, and like the regular ISAs there are two types: cash or stocks and shares. They are tax-free on interest or growth, and typically prohibit money being removed until the child turns 18. In this financial year the annual limit is £4,000, and money cannot be transferred between a Junior ISA and a regular ISA.
Alternatively, you could consider a private pension for the child. This locks the money away until they turn 55, which on the one hand means they cannot waste it but also means it can't be used for things like a house deposit, so it may not be appropriate for everyone. A perk to pensions is that they benefit from 20% tax relief, so if you add £800, the government will add a further £200.
Go for the long haul
A child's saving fund needs to be a long-term investment to maximise growth potential. Remember that even a single payment of a few thousand pounds will grow to a considerable sum in 20 years, so it's important to 'forget' about the money once it's been saved.
Saving over a period of decades means that you can give serious consideration to investing in higher risk funds. They are ill-advised in the short term, but over 40, 50 or 60 years the associated risks decrease - and if you ever change your mind, you can lower the risk levels.
Cut back on outgoings
It's possible you are already spending as little as you can, but for many of us it can be surprising how much money is being spent each month on things that go unused. For example, if you pay a monthly fee for Sky television but only watch the channels that are available on Freeview, or you have an expensive mobile phone contract with unlimited calls and texts but only send a few texts and check your email in the evening.
It's amazing how much a small saving can make: if you spend £6 a day on lunch at work you may be spending around £1,500 each year. If you saved that from your child's birth until they turned 21, you would have saved £31,500 - before any interest had been applied.
Monitor the interest rates
A lot of accounts have higher rates for new customers, but these drop after 12 months. To get the best growth you need to keep an eye on the rates and move the money if necessary.
Do you have other tips for saving for your child's future? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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