Putting away some money for your child is a great way to set them up for success in their early adult life. The Independent reports that more than three-quarters (76%) of parents and guardians with children under the age of 18 are saving for their futures.
While many parents are putting money aside for their children, 83% of those saving are doing so exclusively in cash. This could reduce the potential for their savings to grow into the future.
The value of cash savings can be gradually eroded thanks to inflation, so how can you save more effectively for your children’s financial future? Read on to find out.
Inflation is an important consideration for your savings
Inflation is the rate at which prices rise. According to the Office for National Statistics, the current inflation rate, as of August 2021, is 3%. This means, on average, prices are 3% more expensive now than they were a year ago. Over many years and decades, the price of goods can rise substantially.
As an example, the average price of an 800g sliced, white loaf of bread in the UK in January 1980 was 32p. In January 2000, 20 years later, the average cost had risen to 52p. In January 2020, 20 years later still, the cost had almost doubled to 103p.
Simply put, goods that cost £100 in the year 2000, or in the year 2020, will cost more to buy today.
As a saver, inflation is bad news for your savings. If you keep your child’s savings in cash, it’s possible that any interest earned on that money will not match the rate of inflation.
This means that your money is growing at a slower rate than average prices are rising, which reduces the purchasing power of your savings.
The alternative to cash savings is to invest your money for the future. While riskier, investing for the long term offers the potential to generate a higher return and protect the real value of your savings going forward.
Investing tends to result in better returns in the long run, while cash remains stagnant
According to Moneyfacts, only one children’s savings account manages to match or rise above the current rate of inflation, as of September 2021. This is the Santander 123 Mini Account, and even then, you can only use it until your child is 12 years old.
Since saving for your child is likely to be a long-term endeavour, probably 10 years or more, and interest rates are currently at record lows, it may be worth investing for your child instead. Experts recommend that an investment be left for a minimum of five years.
Barclays have looked at what would have happened with a £10,000 investment made in the year 2000. The graph below shows that, despite high interest rates in the early 2000s, investments on the FTSE 100, FTSE All-Share, and global investments would have all outperformed cash savings.
Furthermore, cash savings have experienced a period of limited growth since about 2008, which doesn’t appear to be changing any time soon.
Source: Barclays. Notes: Cash is the JP Morgan Cash Index UK (3M), developed market shares are represented by the MSCI World Index (GBP unhedged), UK Large Cap shares are represented by the FTSE 100, UK Shares are represented by the FTSE All-Share. All returns other than cash are gross of fees (so do not include a deduction for charges).
Always remember that the past performance of an investment is not necessarily indicative of the future.
A Junior Stocks and Shares ISA is a simple way of investing for your children
One easy way to invest on the stock market, as an alternative to cash savings, could be to open a Junior Stocks and Shares ISA. This kind of ISA is one of the most popular and effective ways to invest for your children’s future.
This is because you will not have to pay Capital Gains Tax or Income Tax on your returns, and they tend to outperform their Cash ISA counterparts.
Moneyfacts looked at the performance of Stocks and Shares ISAs and Cash ISAs between March 2020 and March 2021. They found that the average Stocks and Shares ISA grew by 13.6% during that period, while the average Cash ISA grew by just 0.63%.
You may contribute up to £9,000 into any Junior ISA during the 2021/22 tax year, and the performance of your Junior Stocks and Shares ISA will be dependent on the performance of the underlying shares it is invested in.
Any money deposited into or gained from your Junior Stocks and Shares ISA cannot be accessed until your child turns 18.
Investing could provide more benefits for your child
While cash savings are safe and stable, they might limit the potential of your money to grow. Cash savings are great if you need them within the next few years since they are so easily accessible, but they aren’t necessarily so effective when saving for your children in the long term.
Though you can never be sure whether your investment is going to yield positive returns, it is worth remembering that investments tend to outperform cash savings over a long period. Whether you decide to save in cash or through investments should be unique to your own situation.
Contact us if you’re unsure which would be better for you, or if you’re looking to get started with investing.
Get in touch
If you’re interested in investing or you’re not sure how to start saving effectively, get in touch. Email firstname.lastname@example.org or call us at 0207 808 4120 to find out more.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.