Money Saving Tips to Create the Best Investment Plan for your Childs Future
Updated: Jan 14, 2022
How much should I save for my child? It’s a question that the majority of parents ask themselves throughout their children’s lives. Every parent wants the best investment plan for their child’s future, but, what is the best investment plan for a child’s future? The simple answer is there isn’t one. If you're looking for the best way to save money for your child’s it depends on your current circumstances and how much money you are able to save month by month, year by year.
Money has found that as much as 4 in 10 British parent’s are unable to regularly save for their children's future and even those that are able to save on average £34 per month, which totals around £10,395 (plus interest) by the time a child reaches their 18th birthday.
In this blog I am going to go over some best ways to save money for your children. But instead of answering the question of how much money you should be saving for your child, I am going to go beyond a money saving plan and talk about the best investment plan for your child's future. It may involve more risk but for the 4 in 10 who can’t regularly save for their children, or the average person managing to save no more than £34 per month some of these methods will go beyond a child's saving account and look at creating meaningful wealth for your children when they reach adulthood.
Junior ISA’s or Children’s Trust Funds
According to a survey discussed in thisismoney, a junior ISA or Child Trust Fund were the most common accounts of parent’s saving for their children. A Junior ISA and a Child Trust Fund are basically the same thing, however Junior ISA’s offer more flexibility in the investments you can make within the fund. It’s also important to note that Child Trust Funds are only for children born between 1st September 2002 and 2nd January 2011.
So when looking for a child saving account, a junior ISA is probably your best bet. So is this a good way to save money for your child? I think for the average person, it’s most definitely not. If we compare the rates of Junior ISA’s we can see that even the best rates you will struggle to find a return of more than 2.5%. From 1989 to 2021 the average inflation rate in the UK was 2.5%. That means for the average investor, you are making little to no realised gains on the money you are putting aside.
Now, for the wealthier saver there is no doubt advantages putting a good proportion of money saved in a Junior ISA. After all it is one of the safest ways to save money and means there is a proportion of savings which are safe and you don’t need to worry about. But this is for the type of individual that is looking to save tens of thousands of pounds for their children and ensure financial security.
For the average investor this is not the case. In fact, when surveyed thisismoney reported that 2 in 5 adults actually predicted a pot closer to £5000 saved when their child turned 18 compared to the £10,000 which is the average.
Things are Getting More Expensive
So, the average person is able to put away between £5000 - £10000 for their child over their 18 year childhood, and even that may be a bit optimistic. If you are able to put away between £17.50 and £35 a month for your child, not accounting for interest you will end up with between £3780 and £7560 after 18 years. If we look at the returns you get in a Junior ISA you are making 2.5% per year (+ or - 1%), which would equal between £4730 and £9460 over 18 years. This confirms the rough estimates we went over earlier.
But if we now look at the expected costs of some of your child’s milestones, things get a bit more scary.
The figures, as outlined by money.co.uk, below are from May to 2020 compared to what costs are expected to be by the time your child meets the milestone
Learning to Drive at 17
£2393 (2020) to £3351 (2037)
→ 40% increase
3 Year University Course at 18
£57,265 (2020) to £89,314 (2038)
→ 56% increase
10% Deposit for a House at 30
£17,949 (2020) to £125,956 (2050)
→ 700% increase!!
The money you have put away for your child would have appreciated by 25% with a Junior ISA. So it is clear, for the average saver, you are actually losing money against your child’s needs when choosing a safe option such as a Junior ISA.
Time to Take Some Risks
Now I'm not saying that a sum in the region of £5000 to £10000 will do nothing for your child as it is clearly still a large sum of money. But in terms of the impact having a child's savings account has for the average saver, it does very little to impact those milestones listed above. Yes, it may be able to get them their driving licence, but the effect it will have on the larger and more important milestones such as obtaining a degree or buying a house is negligible.
That’s why I advocate that when looking for the best investment plan for a child's future, go for a high risk, high reward strategy. This may require more time and effort and the practice of looking into things such as crypto and stocks, which you may have no experience in. But the time you put in will create a money saving plan which has the potential to make a meaningful impact on your child's future.
And I speak from experience. In 2009, when I was just 12 years old, I put just over £300 of my savings I had gained from a couple business ventures at school as well as birthday and Christmas money into Apple shares. Later, in 2014 I had managed to save a good amount more from a weekend job I had and bought just over £1000 worth of Tesla shares. For a combined investment of £1400, the value of those shares today (at the time of writing) is just shy of £50,000.
In less than 13 years, I would have made 35x my initial investment. Now it's not to say I have nearly £50,000 today as I sold way too early and now own zero Apple or Tesla stock. But that's the beauty of doing these kinds of investments on behalf of your children - you won’t be tempted to sell. Sitting on your hands is the best way to realise big returns when investing in stocks, and investing for your children is a sure way to ride the ups and downs without being tempted to sell.
Looking into the Future
The reason why I draw on my personal experience is because I made these investments at a young age. I didn’t have a clue about finance, I didn’t have a major in business, I didn’t even know anything about the stock market. But what I did see is an opportunity and I acted on it.
I invested in Apple because I saw the release of the iPhone. I saw how it revolutionised the telecommunications industry and I saw they had very little competition and had serious first mover advantage. I also knew the success they had with the iPod and saw the iPhone taking a similar path.
I invested in Tesla because I saw a shift starting to happen. I saw that the green movement was growing in significance and I saw that people were becoming more aware and conscious of the environment. With Tesla, I saw a company that put innovation first and despite operating at significant losses, they operated with a purpose and with a view to change the world. I saw they had an absolute genius as their founder who put purpose over profits.
In both cases, I saw a future where products produced by these companies will play a vital role. Again, I was 12 and 16 years old respectively when I made these investments. If I can do it, so can you. It’s not about analysing company financials, and looking at their profits and past stock performance. It’s about looking to find companies that have the potential to play an integral part in the world at the time your child turns 18. So don’t ask yourself ‘how much money should I save for my child?’, as yourself ‘what can I invest in that will play a part in the world my child will grow up in?’
Crypto’s Part to Play
Now I know crypto is still a scary and novel concept to many of you, so I don’t want to go into too much detail here and change it into a crypto article. But, what I will say is when thinking of the best investment plan for your child, crypto should be a part of that plan.
Now, the degree to which it plays a part will depend on your understanding of crypto. What I would say is invest 5 to 10 hours researching it. Cover the basics, what is blockchain, what is DeFi, what is Web 3.0, what is staking, how to use exchanges.
If you still struggle to understand any of it after 5 to 10 hours then make crypto a much smaller part of your investment strategy - maybe 10% of your portfolio. Stick to larger, well known crypto assets and major exchanges such as Coinbase that are simple to use.
If it does make sense to you, then spend much more time researching it. Go down the rabbit hole and find areas that interest you. Then find coins within these areas that have a solid team, a solid use case and solid tokenomics and start investing in these areas. With an understanding I wouldn't shy away from putting at least 40% of the money you are able to save for your child into crypto.
The gains I mentioned above with growth stocks such as Apple and Tesla can be magnified by 10 in Crypto, and in a much shorter time frame. For example, in 2017 I found a Crypto called Chainlink. I saw it offered something new to the Crypto space - interoperability and I knew, if successful, it would play a vital role in the future of Crypto. I put £250 into it in 2017 and by the Summer of 2020 that £250 was worth over £10,000. At its peak, that initial £250 would have been worth over £25,000.
We are now entering a time in Crypto where mainstream adoption is beginning to take place. Look for the cryptos that have real world applications, and spread your investments over high, mid, low and mid-caps. Again, only if you have an understanding of it, if not allocate a smaller proportion of capital and stick to high caps.
How to Come Up with an Investment Plan
So, for the average investor I think it clear by now that I think picking the safe route and going with a child's savings account isn’t going to get you very far. However, I am aware that there are some who are more risk averse than others and thus some may not feel comfortable putting their child's future savings in the hands of some bets on growth stocks and the perceived risk of crypto.
So what I would say is consider your risk preference and pick a strategy that suits you. For the risk averse, I would still suggest having no more than 30% of the money you save for your child in a Junior ISA or child's savings account. 30% should be allocated to index funds or ETF’s. These track a pool of stocks in particular sectors or you can invest in the entire S&P 500 or Nasdaq for example. This is a safe entry into investing and offers average yields of around 7% - 9% as opposed to an ISA’s 2.5%. Next I would put 20% into blue chip stocks which pay dividends, think the likes of CocaCola, Phillips, McDonalds etc. Basically companies you get an annual return on (in the form of stocks) and companies you know will stand the test of time. The remaining 20% should be allocated between growth stocks and crypto, with the amount in crypto depending on your knowledge and understanding. Again, the potential reward is so high I would advise at least 10% into crypto investments.
When looking for a money saving plan for the more risk prone, I would recommend scrapping the Junior ISA or child bank account altogether. Put 40% of the money you save for your child into safer plays i.e. index funds, ETFs and blue chip dividend stock. Then put the remaining money into higher risk, higher reward plays. The split between growth stocks and crypto with the remaining 60% will depend on your knowledge and understanding of crypto. But regardless of how you split it up, just remember to look into a world that exists when your child is 18 and imagine what stock/crypto could play a significant role in that society.
How to Action this Plan?
With the average investor saving between £17.50 to £35 per month for their child, or, £210 to £420 per year, you may be wondering how it is best to allocate this money into a diversified portfolio.
In this regard, dollar cost averaging is a very powerful tool. Dollar cost averaging is basically investing a consistent amount into an asset class in consistent time periods. In fact, many stock trading apps and even crypto platforms let individuals automatically dollar cost average. This basically acts as a direct debit, taking a consistent amount out of your bank every month and putting it into the asset class you choose. When looking for the best way to save for your child, I would highly recommend dollar cost averaging in this manner as the way to go.
However, as discussed earlier in the article, it is difficult for parents to save for their children consistently, and many parents may need to skip months to pay for more pressing matters. In this case what I would suggest is to save what you can month by month and come to an investment decision at the end of each year. You can still allocate your funds over different asset classes but do it on a yearly basis as opposed to monthly.
In fact, this can actually be an effective way to diversify your portfolio. Warren Buffett's famous quote to “Be fearful when others are greedy and greedy when others are fearful” can be implemented in this fashion. When markets are roaring and there is clear greed, either keep money as cash in a child's savings account or choose to put money in the safer ETFs and Indexes which see less volatility. When the economy is down and out and prices are far from all time high, use this as an opportunity to scoop up cheap growth stocks and crypto. Remember you are investing with a very long time horizon so picking up stocks and crypto that you see fairing well in 5, 10, 15 years at a time when they are almost looking dead (like I did when buying Tesla) is actually the most lucrative to buy these assets.
Teach Your Child to Save
By now we have covered how you can create the best investment plan for your child's future, but, for some, even saving a little bit can be difficult. If this is the case, or not, you should be teaching your child to save throughout their life.
My parents weren’t able to save a penny for me by the time I was 18. But by the time I was 18, I had a lot more money than most people my age. I was taught about the importance of saving money and putting my money to work. This is equally as important if not more important than saving money for your children and handing it to them on a silver platter.
It was because of this I had the £300 to put into Apple stock at the age of 12. It’s because of this, I made sure to find myself a job at the age of 16 and save my income to invest in Tesla. And although I do not own my Tesla and Apple stock today (annoyingly so), it taught me at a young age how the markets can both give and take away. It taught me the importance and the power putting your money to work can bring.
In conclusion, in this day and age you should no longer ask yourself how much should I save for my child. For the average person, any money saving plan is redundant if you don’t put the money you save to work.
So, when thinking of the best investment plan for your child, think about your tolerance to risk, think about how much is realistic to save on a monthly or yearly basis and most importantly think about the future. Create an investment plan which has the future in mind, regardless of your risk preference.
Things are getting more expensive and more expensive at a faster rate than any child's savings account can offer. So take some time to do research into areas you may know nothing about, always be on the lookout for what could be the next big thing and utilise things such as dollar cost averaging to take advantage of what you learn.