It is something that is easily overlooked but bringing up a child requires a massive investment, not only emotionally but financially as well. And although the former costs nothing but the investment of love and attention, the financial side of bringing up a child can be a real struggle and sacrifices often have to be made just to meet the day to day living expenses.
Aside from the upbringing of your children there is also their future to think about and long term costs such as sending them to university, helping them to buy their first car or even paying towards their wedding or first home. So if you do have enough to put aside each month, what are the options for saving towards their future?
Children’s savings account
Most banks and building societies will offer savings accounts for children which are a great way to not only build up a savings pot for your child but also teach them how to get into the habit of saving up for the things they want.
And because these are long term savings accounts it won’t take up a huge chunk of your monthly earnings to build up a nice little nest egg as just £50 per month from birth to age 18 could add up to over £14,000 with an interest rate of 3%.
And you can tailor the account to your saving needs so if you are saving from birth you will not want to dip into the funds and so a higher interest fixed rate savings account that locks your money in for a certain period of time would probably be the best option. However, if your child is older an may need to dip into their savings every now and then an easy access account that does not charge for withdrawals would be more suitable.
After the withdrawal of the Child Trust Fund (CTF), the government launched Junior ISAs as an alternative savings vehicle for children. They work in the same way as a regular ISA in that there is a certain amount that can be invested each year, there are two types of investment options (cash or stocks and shares) and, most importantly, they are tax-free.
The annual limit for a junior ISA is £3,600 per year and if the full amount is invested each year from birth until the child is 18 then as much as £85,000 could be accumulated, again based upon an interest rate of 3% per year.
Your child will take over responsibility for the ISA when they turn 16 and when they reach 18 the account will become a standard ISA.
Junior ISAs are available to children born before September 1 2002 or since January 3 2011. Those born between those dates will have a CTF. Money invested in CTFs is also tax-free and the rules were changed to bring CTF’s in line with Junior ISAs. The amount parents, grandparents and other friends and relatives can invest each year is now £3,600 – the same as Junior ISAs. It used to be £1,200 a year.
Click here for an article by the BBC about the positives and negatives of junior ISAs.
Savings bonds are another government-backed option that has tax benefits. Offered by National Savings and Investments (NS&I), savings bonds provide tax-free interest for children under the age of 16 and also pay out an additional bonus if the money remains untouched for five years. However, compare the rates of interest with those available on standard children’s savings accounts as you may be better with a standard account.
The best time to save
Obviously, it is better to start saving sooner rather than later as the longer you are saving the more you can invest and the greater your return. But it is important that you only start saving when it is financially viable for you to do so, if you have outstanding loans or credit cards it may be a better idea to pay them down first and then put aside any surplus money you have once they are paid off.
This is because the interest rates you will pay to lenders far outweighs any return you will make on savings. But once you can start saving then be sure to choose the right savings product for you and your child’s needs and put aside as much as you can possibly afford to get the best return for your child.