It comes as no surprise that kids – and life for that matter – costs a lot of money. Which is why saving for your children’s future is a great idea, providing you have an income that allows for it. From college tuition fees, house deposits, weddings, and even retirement, there are dozens of huge expenses that creep up in our childrens' lifetimes. But the good news is that as parents, you can do something to take some of the financial weight off.
But surprisingly, very few people know all of their options to save for their children. So here are a few ideas that can help you find the best way to invest in their future.
Why should I save for my child’s future?
If you have children and the financial means to do so, saving for children is a great gift which can help set them up for the future. There are many potential reasons to start saving up money to give your kids one day. Whether it’s paying for their education, a deposit for a house, or having some money stashed away for a wedding, it’s a good idea to start putting money aside for your child as soon as they’re born. Because the reality is, life is expensive! But by putting some money aside for your children, you can secure a brighter future and give them the boost they need when the lifetime finances start to kick in for them.
Can I save for my child’s future with little money?
Rather than clinging onto the idea that you need to be on a secure and high income to start saving for your child’s future, every little bit can get your child closer to achieving financial security in adulthood.
You can consider dropping regular sums of money (this could be as little as £20 per month) into a savings account for your child. And if you require a little discipline in order to stay consistent, why not consider setting up a direct debit into a bank account which automatically deducts some of the money and shoots it off into a secure place where interest rewards are accumulated over time?
How much should I save for my child’s future?
There’s no one-size-fits-all answer to this question, and how much you save for your child’s future is dependent on two key factors: the goals you have for your children (it could be paying for their education or their wedding for example), but more importantly, your own financial circumstances. You have your own retirement plans and emergency funds to consider. So before you start, it’s worth ensuring you have enough money in your own bank account before saving for the little ones.
A good starting point when saving for your children is setting aside 3% to 5% of your net monthly income. Let’s say your household income is £6,000 after taxes, this works out to £180 to £300 per month. It doesn’t seem like a lot, but every little helps, and could sit neatly within your budget.
If you need a helping hand with determining how much to save for your child’s future, consider talking with a money coach who can help map out a concrete savings plan for your child that aligns with not only your own budget, but your personal financial goals too.
The sooner you start, the better.
Tips for saving for your child’s future
1. Start ASAP!
If you want to build a nest egg up for your child, there’s one you thing you should know: the sooner you start saving, the better. This is particularly important if you have a low household income, since it allows you to save small amounts over a longer period of time and spread the cost.
And when you start saving for your child’s future sooner, you will begin benefiting from the magic of compound interest – earning interest on top of your interest. So think of starting to save for your child’s future early as the snowball effect – the longer it rolls down the hill, the bigger your child’s nest egg gets. So whether your child is in preschool or high school, you can always take steps to put them in a position to succeed in the future.
2. Open a savings account
One of the most obvious ways to save for your children’s future, is to open a traditional savings account. But let's admit it, the interest rate isn't that exciting, so won’t grow that much over time which is why investing might be a better option (more on that later). That being said, your money will still be securely saved in a bank which means you can have peace of mind. It also means you can take the money out if an emergency arises.
3. Open a kids saving account
Many banks and building societies will offer children’s savings accounts. These accounts designed for little ones can be opened on behalf of a child under 18 and usually pay a slightly better interest rate compared to the standard saving accounts for adults out there. And it’s that higher interest rate which will aid the process of growing that nest egg for your child.
But aware that if accounts in your child’s name earn more than £100 per year, you may face taxation for this income as their parents. So make sure that you’ve got a plan to pay this bill if you’re likely to exceed the allowance. There’s also nothing stopping you from doing some research online, or talking to friends and family about how they save money for their kids.
4. Open a high-yield savings account
A high yield savings account can be the perfect solution to help you reach your child’s financial goals. With interest rates well above the national average, you can watch your children’s savings grow faster than ever before. This might be a sensible option if you’re not comfortable with the unpredictable nature of the stock market, as it provides a competitive interest rate on all your deposits which facilitates growth. While the interest rate may vary over time, your short-term savings will remain stable and secure.
5. Invest a pool of money
The optimal way that ensures you're saving money for your children’s future is by investing your money. This is a fantastic option that allows the sums of money you’re pouring into your child’s future to grow over a long period of time. Whether investing in stocks, shares, ETFs, commodities or other mutual funds, you can set your children up for long-term success from the get go. In the same way as interest in the bank, any growth or dividends that are in your child’s name could be potentially taxable once they exceed £100. To avoid these tax burdens, many people use structures like trusts. If you think this could be beneficial for you and your children, it’s worth speaking to an expert as they’re quite complex matters.
Nonetheless, the good news is that you don’t need a lot of money to get started investing. You can invest as little money as £50 a month if you need to. And providing you have a well diversified portfolio of investments, then you can benefit from the average growth of 7-10% of market growth every year. Want to learn more about investing? Get started here.
6. Set up a pension fund
Saving for your child’s retirement might seem a bit too far into the distance. But the benefit of saving for your child’s pension is that they’ll only be able to access the money, depending on the country you reside in, from between 50 and 60 onwards – aka, when they might really need it.
Consider setting up a junior pension - in the UK, this is a Junior SIPP (Self-invested Personal Pension) - where you consistently put a certain amount of money into a pension fund every month. By saving into a private pension fund for your child, there’s potential for long-term financial growth. So it’s a great way of building your kid’s nest egg – but a nest egg they can’t touch until the more mature and wiser years of their life.
7. Open a Junior ISA
Junior ISAs, part of the UK’s ISA scheme, are specially designed for children under the age of 18. And yes, they must be opened by a parent or guardian. The good thing about Junior ISAs is that they dodge those any taxes on interest or growth allowing the kid’s nest egg to grow over time. By setting one up in your child’s name, you and other relatives can make regular contributions. You can choose to have either a cash JISA or stocks & shares JISA.
Currently the limit for a JISA is £9,000 per year. This is for each child, so if you’ve got three children and you open three JISA’s in each of their names, you’ve got a total of £27,000 to split between the three £9,000 allowances. Here’s the slight catch – any money saved cannot be withdrawn until the child turns 18. At this point, the money will move automatically into their name and their control, which means if you don’t want your child to potentially do something you wouldn’t approve of with the cash, the JISA might not be the best option.
How can kids save money?
If you’ve decided you’re in a financial position to save for your child’s future, that’s great and kudos to you for making the sacrifice. But it’s also a good idea to get your kids involved in the process of saving – they’re never too young to contribute to their own financial success. Plus it helps children to understand the value of money and instil financial discipline – they should learn that money doesn’t grow on trees! Here's some tips to consider:
1. Give kids a dedicated place to save
When your children are young, they can save small amounts of money – whether that’s money from the tooth fairy or birthday money from a family member – into a piggy bank. And when they’re a bit older, you can help them set up their own bank account where they can start storing small amounts of money which builds up over time.
2. Encourage them to apply for jobs
It’s important for children to save their own money, and one way they can do that is by getting a job as soon as they’re old enough. This way, they can generate their own income, paid directly into their private bank account, and then store some of those earnings into a savings account which sets them up with the car they want to buy or the holiday they want to go on with friends.
3. Encourage them to apply for scholarships and grants
When applying for school and university, ensure that your children are aware of scholarships and grants which can slash the cost of their tuition significantly. Some children might have great academic or sports skills which can pave the way to a scholarship. And if they come from a low-income family, there will often be grants available which will assist them on their path to educational success.
Final thoughts on saving for your child’s future
For the parents out there, it’s likely you want the best for your children. And if you have the financial means to get started, then adopting one or two of these saving tips set you, and your children’s future, on the right path. Whether it’s saving money into a bank account, investing a pool of money into an investment account, or contributing to their pension, there are lots of different ways to build up your kid’s nest egg over time and which one you choose is ultimately down to you. And don’t forget that the little ones can play their part too!
The bottom line is that saving early on can also lead to more substantial gains in the long run, as interest can compound and multiply over the years. That means you don’t need a huge income to do it! Even small contributions make the world of difference over a long period of time, ultimately building financial stability for their education, their first car, and even their down payment on a home. And finally, remember this: when thinking about their future, remember that every penny adds up. Early planning can make all the difference.