Time to read: 6 minutes
Delightful as they are, there’s no avoiding the fact that the little darlings are expensive. Childcare, education, holidays, school trips, ravenous appetites, a seemingly constant need for bigger clothes and shoes – and that’s not even mentioning the outrageous costs of uni fees or getting their foot on the ladder. You don’t know what their future will bring but one thing’s certain – it’s going to need money.
If you sat down and worked out how much it costs to raise your children from birth until they’re 21, it’d make your eyes water.
And of course, they don’t even have to be your kids. Modern families come in every conceivable shape and size. Step-parents, grandparents and foster parents are also keenly aware of the costs involved.
So far, so obvious. Yes, kids are expensive. Instead of focusing on the problem, let’s look at some solutions. Here are some ways we can help you keep that bank of yours open for business – and give them the head start in life that every parent longs for.
There’s no time like the present
The best time to start saving for your family? Probably at least 5 years ago. The second best time? Right now.
The sooner you start saving, the sooner you start earning interest on your interest. This is known as compound interest – something which effectively turns time into money.
With compound interest, it’s all about how much time is on your side. And when it comes to saving, time is the huge advantage children have over adults. And the longer your children’s savings are in place, the bigger they will get.
We’re not talking about saving half your income each month. Just putting aside as much as you can and making regular contributions can make a big difference. Small amounts soon add up.
Here’s an example for you:
If you made an initial deposit of £1,000 and added £100 a month, after 21 years your net contributions would be £26,200.
When you add in a return of 3% (the current rate for many junior ISAs), compounded monthly, this means you’d earn an impressive £10,721 in interest, taking your total savings to £36,921.
Some say Albert Einstein called compound interest the “eighth wonder of the world”. Whether or not he actually said this is up for debate. What is not is the effect it’ll have on your money when you leave it to grow.
Picture your family goals
To help motivate you, it pays to think of the big milestones.
Wouldn’t it be cool to get them on the road when they’re 18 with driving lessons and a first car? Maybe you want to send them travelling to experience life on a gap year before they start Uni. Or perhaps your dream is to help them get that key to their first door?
Naturally, the path they take may be very different from the one you’ve imagined for them. So in the end, it doesn’t matter what you’re saving for. What counts is that by putting some money aside on a regular basis, you’re giving them more options.
Even (especially) if they’re still in nappies, now is still the best time to start saving for the big milestones as it gives your money longer to grow. And as we’ve seen, the more interest you earn, the less of your hard-earned money it’ll take to meet those goals.
Choose the right children’s account
A good place to start could be a children's savings account. These accounts, which can only be opened by, or on behalf of, a child under the age of 18, usually pay a slightly better interest rate compared to adult savings accounts.
You might want to open one children’s account for your child to put their pocket money into, and another for you to pay in any larger amounts.
It's worth remembering that if the account is in your child's name, it's your child's money. Many accounts will allow the adult to stay in control of the money until the child turns 16. However, when they do (or when they turn 18 in the case of a child trust fund or a junior ISA), the money is technically theirs to do with whatever they want.
Understand the tax implications
There’s usually no tax to pay on children’s accounts. However, special rules apply for money given by parents. If you give your child money that earns more than £100 in interest in a tax year, you may have to pay tax on all the interest depending on your personal circumstances including any tax allowances you may have available. Gifts from grandparents, aunts, uncles and friends don’t count towards this £100 limit.
An alternative would be to open a junior cash ISA, where you can save up to £4,368 for each child in the 2019-20 tax year. When they turn 18, the account will convert into a full cash ISA so they’ll never have to pay income tax on it – ideal if the plan is for your child to have high levels of savings by their 18th birthday (lucky them).
The important thing to remember is your children have tax allowances too so it makes sense to use them to best effect. You’ll be better off – and by default, your children will be too.
As with all things tax-related, bear in mind that the value of the benefits to you will depend on your circumstances, and that tax rules could change in the future. To find out more about tax on children’s savings, visit GOV.UK
Remember to factor in inflation
When considering your long-term savings options, there’s a hidden risk you need to be aware of – inflation. Inflation is when money loses value as things become more expensive over time.
As the months and years roll by, inflation will reduce the total value of your children’s cash savings because you’ll be able to buy less with the money.
Going back to the compound interest example, we showed how over 21 years you would have earned £10,721. Yet when you factor in inflation over that period at the current rate of 2.4%1, those earnings would only be worth £1,783.54 in today’s money.
As you’ve got time on your side, now could be a great time to consider investing. Of course, the key thing you need to remember with investing is there are no guarantees and you may not get back what you put in.
However, if you’re comfortable with taking an element of risk, investing for the long-term gives your money greater potential for beating inflation than a savings account. To find out more about the differences between the two, see saving vs investing.
Helping them to grow
Here’s another gem attributed to Einstein: “Not everything that can be counted counts, and not everything that counts can be counted.”
So while setting up savings for your child could create a fantastic nest egg, it’s not the only way to give them a head start in life. Perhaps even more important is to teach them the value of money.
With little financial education being taught in schools, the job of teaching children effective ways to manage money falls to parents, step-parents and grandparents. If, like many, you’re not sure where to start, our helpful guide will give you some ideas.
1Source: Office of National Statistics