How do you provide for your children’s future when you have very little spare cash? It’s not easy but there are ways you can do it – from putting the money away on pay day to making sure it grows as much as possible. Here is our guide to getting big results from small amounts of money.
Open a Junior Isa
Investment returns on Junior Individual Savings Accounts (Jisas) are tax-free, making them a great way to save for your child’s future. They have an annual limit of £9,000.
“The best part of a billion pounds was paid into JISAs in 2019/20 (£971m), so a huge number of parents, and their wider families, are finding a way to give their children a great head start in life,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
She suggests setting up a standing order to come out of your account on pay day – you can invest as little as £25 a month in a JISA – to build up a nest egg before really noticing the money going in to your account.
If you could manage to increase this monthly sum to £55.50 a month, you’d end up with a healthy pot of £18,000 by the time your child hits adulthood.
‘Some months you might have a bit more to put away, and others you might have a little less. But starting early, and regularly putting some money aside is a great place to start,’ says Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International.
Invest in the stock market
Pairing risk with anything to do with children seems like a counterintuitive combination – nobody wants to be reckless when their offspring’s precious nest egg is at stake. However, if your children are still little then time is on your side – any money you put aside now will be able to ride out the ups and downs of the stock market. A general rule of thumb is that if you’re investing for over five years, stock markets will usually rise.
Of all the money paid into Junior Isas in 2019 to 2020, 61 per cent of it went into cash, but Coles believes a stocks and shares Jisa is likely to deliver a better return over the long term.
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“There are some cases where cash makes sense, such as when the child is an older teenager, or where the money is needed for something very specific at a specific time, and this is the only money that will ever be available for it. If you don’t fit into either category, when you’re putting aside money for the long term of up to 18 years, you really should consider investments,” she says.
Ask the grandparents
Coles points out you don’t have to save alone. The Bank of Grandma and Grandad are helping out more than ever, with research showing one in five grandparents are financially supporting two generations of their family since the cost of living crisis struck.
“An awful lot of JISAs are paid into by more than one adult. Grandparents are often keen to do something for their grandchildren, so they might be happy to pitch in with regular payments. If they’re not up for making monthly payments, family members might be very happy to pay money in for things like birthday and Christmas presents,’ she says.
Talk to the children about finances
It’s worth bearing in mind that any money paid in to a JISA becomes the child’s once they turn 18. As they get older, engaging children with their ISA can help build up their understanding before they take responsibility for it, especially if you’ve decided to invest.
“Show them how much has been paid in, and how their ISA has grown,” says Rajan Lakhani, money expert at smart money app Plum.
He recommends talking to children about stocks they might be familiar with, such as shares in digital subscription providers they use (e.g. Disney or Netflix) or supermarkets that you regularly visit with them, to help them learn. Get them to suggest companies they’d like to invest in, then research which might be worthy of their investment.
“You could also talk to them about how you choose the funds for their ISAs, what causes are important to them and how these investments might have a positive impact on the environment or society,” says Lakhani.
If you fear your kids will be too f*ckless at 18, then saving for them using your own personal Isa allowance and transferring the cash further down the line for tuition fees or a deposit on a first home may seem a more palatable alternative.
Start a pension for your child
You can start saving into a Junior SIPP (self-invested personal pension) as soon as your child or grandchild is born. Each child can have a total of £3,600 a year, or £300 a month, saved into a pension. Just as with your pension, the government automatically tops up payments by 20 per cent, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.
“Of course, it’s pretty much inevitable that tax rules and reliefs will change between now and your child’s retirement, and you have to factor in inflation, which will erode the spending power of any money built up in the pension, but you cannot doubt that this is the ultimate way to make sure your child has the makings of a secure financial future,”’” says Montgomery.
Other options
If you’ve already used up your Junior Isa allowance or you’d like more control over your child’s cash, investing in a bare trust will allow you to save in their name with a parent or grandparent as the trustee. These accounts can be accessed before they turn 18 for school fees, for instance, or continue beyond 18.
Unlike JISAs there is no limit to the amount you can save in them. While the investment return is taxed you can use their annual income tax and capital gains tax allowances.
Premium bonds through National Savings & Investments are another popular investment option. You can buy any whole-pound amount of bonds between £25 and £50,000 in your child’s name, and every month each £1 bond is entered into a prize draw.
Apps
In this digital age there’s a plethora of apps and tech solutions to keep your saving on track. The Plum app sets aside small amounts automatically each week, calculating the amount that you can afford from income and outgoings, without you having to work it out for yourself.
“You can set the app up with different ‘pockets’ with goals and adjust how the savings are split between them, meaning you can save smaller amounts in pockets with a longer outlook,” explains Lakhani.
The True Potential app allows users to set a financial goal – such as saving enough for their child’s tuition fees by the time they turn 18 – and then regularly review investments against this, while quickly topping up on their smart phone if needed.
“Our impulseSave technology on our True Potential app allows savers to invest from as little as £1 into their investments. With a Junior ISA you could put in however much you can afford each week, whether it be £1 or £20, and this could build into a significant pot for your child by the age of 18,” says CEO Daniel Harrison.
