Children are expensive. As they get older, one cost is simply replaced with another more expensive one. Clubs and activities, clothes and shoes, food bills, holidays, parties, tutoring, school fees and now to add to it University fees averaging more than £26,000. *
On A-Level results day last week we saw a record number of students having been accepted into higher education this year, making it more likely that today’s parents will have to consider the financial implications of expensive University fees.
Education is one thing that many parents believe is important and worth investing in; but few people could afford to pay this large sum as a one off expenditure, particularly if there is more than one child to consider. However, starting to save a regular amount when your children are young is often more affordable, but also makes better financial sense than saving a big amount later in life. Why? Because of compound interest.
When you save in a savings account it earns interest which is added to the account periodically. The next time interest is added, it will be based on the balance of your saving, plus previously added interest. This is known as "compound interest" and allows your cash savings to grow at a faster rate because the interest itself will earn further interest.
Investments are slightly different. The amount of money you have in your fund will depend on the success of the investments, as opposed to savings which often have a set level of interest.
However, during periods when those investments are successful and make some gains, the compounding effect still applies.
Whether saving or investing is a better option will depend upon a number of factors, including the length of time before which you will need the money or how you feel about taking any risk with your money. Over the longer term (5-10yrs+), investing can achieve a greater return than saving (particularly when interest rates and savings rates are low) but it involves taking some risk as to whether the value of the investment will rise or fall.
Financial planning for large expenses in the future can be a good way of focusing your approach. When children are very young, you may decide that they don’t need presents from wider family members, and instead you may invite grandparents or aunts and uncles to make a donation to their savings. By setting up a way to save now, you are able to offer this as an easy route to investing for your child’s future.
There are many different accounts available to save into depending on what you want in terms of access to the money or tax efficiency for your child.
A junior ISA for example is available until age 18 at which point it converts to a regular ISA, and at this time your child will be able to withdraw the money if they choose. With the same tax efficiency as a regular ISA, you can currently save or invest up to £4,080 in the current tax year. If your child already has an old style Child Trust Fund (CTF - these are no longer available to open), you may want to consider this in which to make regular savings, or transfer it to a Junior Isa, a change which became possible in April 2015.
Of course tax efficiency is not always a concern with children’s investments and there are plenty of other savings accounts to choose from offering varying degrees of flexibility and access to the savings.
If you would like financial planning advice on saving for your children’s future, please say hello, we’d love to help.
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