Following My Money Week, which aims to get children and young people engaged with financial matters, Vanguard has run performance data to establish how much could be contributed to a child’s financial future and demonstrate, to those nearing adulthood, the value of saving and taking care of what you have.
The research shows that small amounts of money invested on a regular basis could grow into a sizeable sum over time.
For instance, if you started investing £100 per month from your child’s third birthday, they could have a pot worth just over £37,000 by the time they turn 18, assuming annual investment growth of 5% after charges.
However, if you were able to invest £300 per month, the pot would be worth an impressive £112,262, which is more than double the average deposit of £53,414 for a first-time buyer in the UK (according to calculations based on the latest Halifax House Price Index.)
Source: Vanguard (for illustrative purposes only, assuming annual 5% return, excluding taxes and charges).
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One way to invest for children is through a Junior Individual Savings Account.
You can invest up to £9,000 per year into a Junior ISA and any interest or gains will be completely tax-free. Once the child turns 18, the money inside the Junior ISA will be theirs to use as they wish.
Only a parent or legal guardian can open a Junior ISA, but anyone can contribute – be they grandparents, aunts, uncles or family friends.
Our research shows that, if a parent’s own needs and goals are in good order, investing on behalf of a child is a smart way to give them the best financial start in life. However, beyond building a sizeable nest egg, the act of opening and contributing to a savings account allows parents to broach financial planning and wellbeing with their children.
Good financial literacy is the foundation of a smart relationship with money and, in this instance, learning by doing – or, in other words, saving – could be a powerful way to instil confidence in a child who will soon be managing their own financial future.
By demonstrating the benefits of saving early, and the power of doing so little and often, parents and other loved ones can help create good money habits as well as ensure future financial security for a child.
However, those who are unsure of their financial knowledge or ability to make informed, money-related decisions on behalf of a child should consider seeking professional advice.
James Norton is head of retirement and investments at Vanguard Europe
