Children born today have a one in four chance of celebrating their 100th birthday. It’s progress that should certainly be celebrated but one that also leads to financial questions. How do you prepare for a life that could span ten decades?
Many parents choose to put some money aside for children to give them a helping hand when they reach adulthood. Whether you’ll be making regular payments or adding money on Christmas and birthdays, you’ll want to ensure you get the most out of your deposits. But choosing how to build up a nest egg for a child can feel more complex than making decisions about your own financial future.
One question to answer first is: Should you place the money in a cash account or invest?
Why consider investing your child’s savings?
It’s natural to want to protect the money you’re putting aside for your child’s future by choosing a cash account with little debate. However, there are reasons why investing may prove to be more efficient.
Even on a competitive child current account, interest rates are low. This means once you factor in inflation, savings lose value in real terms over the long term. If you begin saving whilst your child is very young, this can have a significant impact on the spending power of the money.
Investing provides an alternative, with returns potentially higher than interest rates. However, it’s not as simple as that. Investing does come with some risks, as there’s no guarantee how investments rise and fall. But investing is something you should consider when you’re planning for your child’s future.
If you’re unsure whether a cash account or investing is right for your goals and circumstances, please get in touch.
Should you decide to invest money earmarked for your child’s future, there are some questions that can help you pick out the right vehicle and investment opportunities.
1. How long will it be invested for?
When you start saving, it’s important to have a deadline in mind. If this deadline is below five years, it’s usually advisable that you choose a cash account. This is because investments typically experience volatility in the short term and, as a result, values can fall. This may be an issue if you’re investing for a short period of time.
However, should you have a time frame that is longer than five years, investments may provide you with a way to potentially achieve returns that outpace inflation. This is one of the factors that link to investment risk. As a general rule of thumb, the longer you’re investing for, the higher the level of risk you can take. Of course, other factors influence appropriate risk levels too.
2. What is the money intended for?
You probably have an idea of what the money will be used for. Perhaps you hope it will be used to purchase their first car or support them through further education. You may be looking even further ahead to your child purchasing their first home. What the money is intended for will have an impact on the time frame. But it will also influence how comfortable you are with taking investment risk.
It’s important to remember that if you’re saving the money in the name of the child, they may be able to take control of the account when they reach 16. Whilst you might have an idea of what you’re saving for, they could have very different goals. As a result, speaking with them about the savings and how it might be used can help align your views.
3. How comfortable are you with investment risk?
It’s also important to think about how comfortable you are with investment risks when it comes to your child’s savings. This may be very different to your views on taking investment risks for your own nest egg.
Whilst you need to feel comfortable with risk and the level of volatility you can expect investments to experience, you also need to ensure it’s a measured decision. Our bias can mean we take too much or too little risk when financial circumstances are factored in. Speaking to a financial planner can help you understand what your risk tolerance is. Getting to grips with what level of risk is appropriate can boost your confidence.
4. Do you have other savings for your child?
Do you have multiple saving accounts for your child? Or are other loved ones also building up a nest egg for their future?
Assessing what other nest eggs they will receive when they reach adulthood may mean you’re more comfortable taking investment risk. If, for example, you know grandparents are adding to a cash savings account, this may balance out the risk associated with investments. Answering this question can work in the same way as assessing your other assets when you consider your own investment portfolio.
5. How hands-on do you want to be?
Finally, do you want to select which companies the money will be invested in? Or would you prefer to take a hands-off approach? There’s no right or wrong answer here, but thinking about it can help ensure you pick the right investment vehicle for you.
If you want to take steps to improve the financial future of your child, please get in touch. Whether investing is the right option or not, we’ll work with you to create a plan that you can have confidence in.
Please note: 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.
