MONEY COMMENT
How To Make Your Kids Rich

By Cliff D'Arcy
April 2, 2003

While enjoying a meal in a local restaurant earlier this week, my wife and I started chatting to a couple at an adjacent table, who were being entertaining by my toddler's lunchtime antics.

When Robert and Karen discovered that I'm a financial writer, the first question they asked was, "How should we save money for our son until he's 18?" Without a doubt, this is the most popular financial question I'm asked (probably because I'm always chatting to other parents at the nursery and other child-centred events). The owner of my favourite café also put this question to me, so I'll do my best to answer it here.

Here are the basics of how to kick-start your child's finances from birth onwards:

1. Birth Certificate
Until you've registered your child's birth, s/he doesn't exist (administratively speaking), so register the birth and get hold of a birth certificate ASAP. Without it, the financial wheels can't begin to turn (a spare copy is often useful, too).

2. Child Benefit
This is a tax-free benefit paid to parents of children up to the age of 16 (under 19 if studying full-time). It's paid every four weeks at a weekly rate of £15.75 for your first child and £10.55 for other children.

At £819 a year, you'd be barking mad not to claim it, so make your claim as soon as you have your birth certificate. You should find a claim form in the Bounty Pack given to you in hospital. Alternatively, you can get one from your local benefits agency or claim online. For convenience, ask to have the money paid directly into your nominated bank account every four weeks by direct credit (it saves collecting the money and carrying it around).

3. Savings account
Most parents open a savings account for their children. My Best Buy is Nationwide BS' Smart 2 Save account, which pays annual interest of 4.25%, credited every six months. Also, it offers instant access and the convenience of a large branch network and online access.

As most children don't earn enough to pay tax, always complete form R85 (download PDF file) when opening your child's account (so that savings tax at 20% will not be deducted from his/her interest). Another important thing to note is that it's best to keep money from parents separate from money received from other relatives and friends.

Kids can earn £100 in annual interest from each parent without paying tax, a total of £200 a year. Keeping parental money separate from other cash gifts makes the paperwork simple if the Inland Revenue ever queries how much interest your child is earning.

4. Long-term savings
If you start saving soon after your child is born (or is a toddler), you are looking at a 15- to 20-year investment period. This is an ideal timeframe for stock market-linked investments.

However, there are loads of different savings plans aimed at children out there. The problem is that so many are highly inflexible and don't allow you to stop, start, increase and decrease your contributions. Also, they frequently carry outrageously high charges, so less of your money goes to work on day one.

Make sure you avoid endowment-based savings plans, managed funds and any investments you don't understand. One of the simplest and cheapest products around is an index tracker, which tracks the performance of a stock-market index, usually one of the UK's FTSE indices.

The index tracker is one of the Fool's favourite financial products, purely because it's cheap, flexible and easy to understand. Furthermore, if you use a tax-free ISA wrapper to save in your own names, any income and growth will be free of tax. Marvellous!

If you save your Child Benefit of £816 a year (call it £68 a month) for 20 years, and your tracker grows at 8% a year, you'll create a lump sum of £38,941 (according to our compound-interest calculator). This could help pay for your child's education, a car or a deposit for a house, plus give you "Most Favoured Parent" status forever!

Visit our ISA centre, where you can apply online, and get Make Your Child A Millionaire.