If you’ve got children or grandchildren, one of the best things you can do is invest in stocks and shares on their behalf.
If you start early and build the biggest pot you can by the time they turn 18, you will set them up for life in more ways than one.
Teach them a lesson
Saving a pot of money on your children’s or grandchildren’s behalf can give them a real head start. Today’s crop of undergraduates will leave university with average debts of more than £50,000, according to the Institute for Fiscal Studies. That’s quite a burden, but you can make it a lot lighter for your children if you start investing for them early in life.
Parents or grandparents who saved £50 a month in the average investment trust over 18 years would have £32,721 by the end of June 2019, according to the Association of Investment Companies.
Even if your children don’t go to university, that money is just as valuable. They could put it towards a first car, or use it as a deposit on a property.
Investing today could dramatically improve their prospects tomorrow.
Start ’em young
Some really far-sighted families put money into a pension when their children are born, which means it can grow for at least 55 years (the age at which people can first access their pension), and possibly for 60 or 70 years.
Let’s say you invest £3,600 in a pension for your child at birth. First, this will only cost you £2,880, as you can claim 20% tax relief on contributions up to that amount, even when investing in a child’s pension. Let’s assume it grows at an average rate of 7% a year, minus investment fund and other charges totalling 0.5% a year.
By age 55, that £3,600 will be worth £114,956. If untouched, by age 65, that single payment will have grown to £215,788.
That assumes you never pay in another penny. If you invest £3,600 every year until their 18th birthday and then stop, those contributions will grow to a whopping £1.28m by age 55, or £2.4m by 65 (although inflation will erode its real value).
The miracle of compound growth
While I don’t imagine many families start paying into a pension as soon as their little ones are born, these figures demonstrate an important principle that applies to everyone. Compound growth makes people rich, and the longer it has to work its magic, the richer they become.
It’s a message you need to pass on to your kids.
The sums don’t work as well on a deposit account paying just 1% or 2% a year, which is just one reason why cash is pants compared to a Stocks and Shares ISA.
When investing for your children, you have one big advantage – time. They’re young, which means the money has longer to grow. You can also afford to take on a higher level of risk by investing in stocks and shares, because market volatility isn’t a concern if investing over periods measured in decades.
Investing for children is just as important as investing for yourself. One day, your children can pass on the message to their kids, too.
I guess you could call it learning by doing.