Ten Steps To Financial Freedom Step 9: Make Your Child A Millionaire
One of the best things you can do for your kids is to show them how money works: how to make it, how to manage it, and how to make it work for them. Hopefully, your children will then be able to enter adulthood without serious financial worries, and with the advantages money can buy, and the kind of financial sense that ensures a healthy relationship with their pennies and pounds for a long time to come.
How to invest for your children
Stock market, stock market, stock market! The long-term return on investment in the UK stock market has been around 11% per annum over the last century. Take a look at what might happen if you invest just £25 each month on your child’s behalf, and what might happen if you leave it up to them to start on their own:
| Child’s age | Invest £25pm until 21 then stop | Start investing £100pm from age 21 |
|---|---|---|
| 0-21 | £24,064 | £ 0 |
| 21-60 | £1,409,189 | £696,991 |
| Total invested: | £6,300 | £46,800 |
If you put £25 a month into a tracker fund until your child’s twenty-first birthday, and the historical return had been achieved, it would then be worth about £24,064. If you hand the fund over and it continues to accrue compound interest, then by the time they reach 60, a total outlay of £6,300 could be worth around £1.4m. However, if you invest £100 a month from age 21 to 60, you’d only end up with half this amount, despite having invested considerably more.
For simplicity, we’ve ignored the impact of tax, charges and inflation here, all of which would take a hefty chunk from these sums. But, even allowing for these, the basic message remains the same and that is the earlier you invest, the easier it is to build a significant pot of wealth.
Think about tax, too
If you, as a parent, put money into savings and/or investments for your children then there is one tax rule to bear in mind. If the child earns more than £100 of income then it is treated as your income, and therefore taxed accordingly. However, grandparents and other relatives aren’t subject to this restriction.
Thankfully, to help parents prepare for their children’s futures, the Government has launched a couple of tax-efficient schemes in recent years. Child Trust Funds were available for those born between 1 September 2002 and 31 December 2010, while children born either before or after these dates can have a Junior ISA account opened for them.
You can’t put as much into a Junior ISA as you can into an adult ISA, but you can still build up a significant fund by the time your child turns 18. Be aware, though, at this age whatever is in the Junior ISA belongs to your child (well, young adult), and they can do with it what they want. Arguably, the best thing for them to do is to turn their Junior ISA into an adult ISA, which means any money they have invested can stay protected from the taxman.
Get them involved
The easiest way to teach your children about finance is to get them involved. Investing money on their behalf is a great place to start, but that’s just the beginning. Teach them how money invested sensibly will grow, and how, when the growth is added in, that will also start to grow. Show them how to save by opening a savings account for them, and get them to pay the money in themselves. You could even introduce the idea of buying shares in individual companies.
In the final part of this guide we look at how to keep hold of your wealth once you have earned it.