Five reasons why we must invest for our kids
Investing is one of the things that you'll hear us talk about a lot here at MoneyNotes, and one of our major financial education packages. However, investing isn't just a way to build a great nest egg, it's a great tool to help instill essential discipline and financial education that can be absolutely game-changing in the future.
It has never been easier to invest money for our kids. The good news is that you really don't need a lot of money to start with - a little bit really can go a long way. Sound good? Then without any further ado, here are five things to consider when we invest for our kids:
18 is a magic number. The age you can vote, open a bank account in your own name, and of course, the age when you are technically an adult. It's also definitely a long enough time to invest a decent amount of money, and watch it go through the the financial investment roller coaster of troughs, peaks and growth. Start building an investment nest egg for your kids from day one, and you can give yourself and your children the magical 18 years for the money invested to accumulate to a decent pot.
2. Power of compounding
Compound interest has been called the eighth wonder of the world. Sound complicated - don't worry it's not. It just means that the interest you earn each year is added to the initial amount you invested, meaning it grows at a faster rate. Basically if you invest £100, and end up with £105 after picking up 5% interest in the first year, in your second year, assuming you once again got 5% interest, your money would grow to £110.25 without you doing anything. Now, just imagine this happening over an 18 year period.
3. Cash to Invest
One of the myths about investing is that you need a lot of money to start investing. In reality, you can get started with an initial amount of £100 and keep up regularly investing of around £25 a month. £100 may be a lot of cash to come up with, but you could put away a little bit each month, and add any additional cash you get from friends or family until you build this initial sum.
4. Financial Education
Research points to money habits being formed by age seven. At this tender age, or perhaps even earlier, your kid's investments could be used to provide real life examples of how money works, how it grows, what the risks are and the general principles around savings and investments. This way rather than recklessly spending the nest egg they discover on their 18th birthday, they will (hopefully!) be well prepared as to how to use it wisely, or in the know about how to keep it invested.
5. Junior Individual Savings Account - JISA
JISAs are long-term, tax-free savings accounts for kids. One of the great things about a JISA is that once money is invested, it belongs to your children, meaning that with the exception of extremely extenuating circumstances, parents cannot take the money out. Your child can only get hold of their money when they get to their 18th birthday. While JISAs are great, it is important to note that the government sets a maximum amount that you can set aside each year for your child.
Bringing it all together
So an investment timeline of 18 years means that an initial lump sum of £100 and regular investment of £25 a month could grow to £9,000 - allowing for the power of compound interest growing at 5% every year. Wouldn't this be a pleasant surprise on their 18th birthday?
If you are in a position to start this nest egg for your child, we would strongly recommend that you begin to do so as soon as possible. Invest regularly when you can, and let the investment market help you out with the rest. This may just put your child on a firm footing and give them that initial leg-up required to help them navigate their personal finances as they grow older.