Playing the long game
WHEN it comes to investing, children have one great advantage over adults because time is on their side. Time is the most valuable commodity you can have as compound interest has much longer to work its magic.
Physics genius Albert Einstein famously called compound interest “the most powerful force in the universe”, and the earlier you start investing for children or grandchildren, the sooner it goes to work.
If you can start from birth, then better still. New figures show that if you invest just £1.67 a day, the average price of a cafe latte, they could have a windfall worth £18,000 when they turn 18.
However, if you leave it in a savings account paying near-zero interest, they could end up with much less.
THE FAMILY WAY
Young adults need all the financial help they can get as they face greater monetary burdens than ever before.
Those who go to university will graduate with an average debt of £50,000, according to the Institute for Fiscal Studies, and face other challenges such as saving for a property deposit and pension. The more help you can give, the better.
Many families play safe by putting money into a children’s savings account or Junior cash Isa, because they do not want to expose their little ones to the vagaries of the stock market. However, Andy Parsons, head of investments at The Share Centre, said the average high street bank currently offers savers just 0.35 per cent: “That means for every £100 you trust them with, they will give you 35p at the end of the year.”
Children are actually in a better place to take risks, because they have years to recoup any short-term losses from stock market volatility.
Investing £1.67 a day, which is roughly £50 a month, could turn into £18,000 by 18, assuming the market grows at an average 5 per cent a year over that time.
To generate £18,000 from the average savings account you would have to increase your contribution to £2.65 a day, or more than £80 a month, which would cost an extra £6,400 over 18 years.
TAKING TIME
The longer your timeframe for investing, the easier it is to hit your investment goal, as growth and dividend interest compound year after year. So if you wanted to generate a £21,000 lump sum by your child’s 21st birthday you would need to put away £1.57 a day. This falls to just £1.16 to achieve £30,000 by age 30, and a mere 84p to have a £40,000 windfall by 40.
Parsons said: “From little acorns mighty oaks grow, so set up a small direct debit and forget about it.”
Investing isn’t just for high-rollers, he said. “Many investment funds will accept regular monthly deposits from just £50.”
You should know your time frame from the outset: “If your child is going to university soon or is looking to buy a property, take fewer chances as you do not have time to recover from a downturn.”
In this instance, cash may still be king. Over longer periods, the stock market should deliver the most royal returns.
ADVENTURE
Patrick Connolly, certified financial planner at Chase de Vere, said do not put all your eggs in one basket but spread your money between different countries, sectors and markets: “This way if one falls, another may rise to compensate.”
Make use of your child or grandchild’s Junior Isa allowance, which allows family and friends to contribute up to £4,260 this financial year, or £355 a month, with all returns free of tax.
The money is theirs from the age of 18 when it can be converted into a tax-free adult Isa.
Adrian Lowcock, head of personal investing at advisory group Willis Owen, said there are now almost a million Junior Isas, but most have chosen cash over stocks and shares, despite the poorer long-term returns: “You need to be a bit more adventurous. Children can afford to take a few risks.”