Why you shouldn’t be putting your kids savings into cash

Saving for children - and why you shouldn't put their money in cash

It’ll come as no surprise that when my daughter Audrey was born in 2013, my life suddenly changed.

But while I had anticipated a huge shift in my social life, making the move to freelance journalism and a significant lack of sleep, I never predicted that Audrey’s birth would be the catalyst that caused me to invest in the stock market for the first time.

You would think that I have been all over the stock market given my career, but at that time, other than my pension, I never seemed to have money that I wanted to lock away for five to ten years. There was always something to save for that was more immediate, whether it was a house deposit, a wedding or renovations.

When I became a parent, my outlook on the future changed. The money I would be saving each month for my daughter wouldn’t be spent for at least 18 years – and thanks to pitiful cash-savings rates and the corrosive effects of inflation, Audrey’s nest egg could hardly be expected to grow at all if it was kept in cash.

 

WHAT I’M DOING FOR MY DAUGHTER

I opened a Junior Isa (Jisa) at one of Britain’s biggest investment firms, Hargreaves Lansdown, and invest monthly on Audrey’s behalf via a standing order. The money goes into two funds; Artemis Global Income and Old Mutual UK Smaller Companies due to their exposure to long-term growth assets and proven track record over a market cycle. I liked the fact that the Artemis fund paid an income which I chose to automatically accumulate, buying more units and harnessing the power of compound interest.

I am happy to report that the funds have grown in value by about 30% – not bad going for a beginner if you ask me.

Yes, I know what you are thinking – what if I lose the money? But I’m realistic: I know that one can lose money on the markets and as every disclaimer points out, share prices can go down as well as up and past performance is no guarantee of future returns.

But, when I set up Audrey’s investment Jisa, I knew that the money I put in wouldn’t be spent until she was at least 18 (later if I have anything to do about it) and I’m comforted by the fact that, over the long term, you are unlikely to lose money in the stock market.

The probability that shares will outperform cash savings is 75% over five years, increasing to 90% over 10 years and 99% over 18 years, according to an authoritative study by Barclays that uses data going back to 1899.

However, one thing that is certain is that thanks to that pesky thing called inflation, (currently 2.7%), had I opted for a cash Jisa or a children’s fixed saver with the current average rate of 2.34% and 1.31%, respectively, the balance would have shrunk in real terms – and over time, this would deal a devastating blow to the overall amount.

Figures from Investec show that parents who put £5,000 in a lump sum into a child’s cash savings cash account between January 2004 and December 2016 would have ended up with £6,571. However, they will have lost their child purchasing power by 2.3%. In other words, their £5000 was worth £4,885, when adjusted for inflation.

Now what was that about losing money?

 

WHY ARE MOTHERS RELUCTANT TO INVEST FOR OUR KIDS?

So much of parenting is risk management, so it’s hardly surprising that 61% of parents have opted for what seems like the safest option for their JISA: cash.

But while investing for your children seems the obvious course of action to me, official data shows that women are three times more likely to open a cash Junior Isa than put the money in stocks and shares. It seems most mums are worried about “gambling” with their kids savings.

But it’s a shame really, as research shows that women are great investors: analysis of Hargreaves Lansdown clients reveals that in the three years from August 2014-August 2017, women outperformed men by an average of 0.81%. Which, I’ll admit, doesn’t seem like a big deal, but if that performance was replicated over 30 years (because you were saving for retirement) women would end up a 25% bigger portfolio than our male counterparts.

One of the biggest barriers for women is our perception that we don’t know enough about the market to invest, and have no idea how to start. According to research by Alliance Trust Savings, 40% of women turn to their friends and family for financial advice, rather than seeking help from an expert – compared to just a fifth of men.

But you have made it this far into this blog post, so you are already off to a cracking start.

 

 

DON’T ASSUME YOU HAVE TO BE LOADED TO INVEST

Don’t assume that you must be rolling in the dough to put aside money each month to invest, although many parents think the opposite: most women believe that they need thousands of pounds a month to dip their toe into the stock market, according to a poll by Boring Money, an investment website.

In fact, online investment firms such as Hargreaves Lansdown will let you start with a £25-a-month direct debit.

To make saving a habit, sometimes all it takes is changing when you save.

Forget using the money left over at the end of the month to allocate to savings because, as a parent, you rarely have any left. Instead, make saving a priority and set up a direct debit that leaves your account immediately after you get paid, making saving for your children one of your fixed expenses.

HOW TO GET STARTED

Setting up a Jisa is easier than you might think.

First, choose an investment firm to suit your needs. For beginners with smaller sums to invest, Hargreaves Lansdown is worth a look. Admittedly, it is one of the more expensive firms its own charge is 0.45% a year, on top of the fees charged by the investment funds you choose – but its website is easy to use and provides practical information to help you get started. And it is well known for top-notch customer service.

Fidelity Personal Investing is also well suited to first-time investors as it offers comprehensive guidance. It also has lower charges, typically 0.35% plus fund costs.

While Vanguard is a cheaper option with a low annual account fee of just 0.15%, which is capped at £375 per year. But you must put in a minimum of £100 per month, which might put some first-timers off.

Once you register, sign up for a Junior Isa, a tax-free vehicle in which to hold your investments. Once opened, anyone can contribute £4,128 this tax year, and £4,260 in 2018/19.

 

CHOOSING A FUND

Choosing which funds to choose can feel an overwhelming task – trust me, I know.

But I was lucky that one of my daughter’s godmothers, Emma, is a senior editor at Morningstar, the investment research company and she could help me with the decision-making process.

But in case you don’t have an Emma to ask for help, and as you know, I’m not qualified to legally provide you with financial advice, I asked a couple of experts for their top picks for beginners, just for you.

Philippa Gee, the founder of Philippa Gee Wealth Management, suggested: “I would always go for something diversified and not expensive such as Vanguard LifeStrategy 60% EquityL&G Multi Index 5 or Standard Life Myfolio Market III.”

Patrick Connolly, chartered financial planner at advisers Chase de Vere, recommended three funds worth a look – Investec Cautious ManagedHSBC FTSE All Share Index and Rathbone Global Opportunities.

“My advice to parents, especially novice investors, would be to keep things cheap and simple,” said Martim Bamford, a financial adviser at Informed Choice.

“I’m a fan of the HSBC FTSE All-Share fundVanguard Life Strategy 80% Equity or Fundsmith Equity,” he said.

 

A WORD OF WARNING

As with most things financial, there is always an element of risk involved.

With a Junior Isa, once cash is invested, it belongs to the child: which means that you can’t get it back it, no matter how much your need the money.

What’s more, once your little darling turns 18, you will have no say how the funds set aside are spent. While you might want it to go towards university fees, your child could well have other ideas. After all, ask yourself what your teenage self would have done with a nice little lump sum?  My plan is to start laying the groundwork on this one early.

 

 

 

 

 

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