Best Way To Start Saving For Your Child
Being a parent comes with different responsibilities. Parenthood can be an endless journey of expenses and financial stress. This is why you need financial planning. An important aspect of this is to think about the best way to start saving for your child.
Being an adult isn’t easy and it doesn’t get any easier when you become a parent. Every decision you make is with you and your family in mind.
This means when you think about your retirement savings, for example, you must also be thinking about your child’s college funds and the likes.
The best investment you can give your child’s future isn’t always education, sometimes it is savings. Couple that with teaching them valuable money lessons and you would have done them a world of good.
I have a more comprehensive article on how to teach your child about money here.
When Should You Start Saving For Your Kids?
Ideally, saving for your kids should start as soon as you start a family. Saving for your children as early as possible saves you future stress and headache. It reduces the burden you have to shoulder in the future. But it is never too late.
Putting money away for children is a great way to teach them about financial literacy, especially when you have them participate actively in the process.
This is a great first step to teaching them about wealth building.
There is no limit to how much money you can save for your child. This decision is entirely up to you.
Here are some best savings options that you can start for your child.
Children’s Savings Accounts
To a layman, saving money for children will probably mean getting a piggybank or keeping the money in their personal or fixed account. But that is wrong. There are better ways to go about this. Financial institutions understand the importance of children’s savings and as such, a lot of them have created packages around this.
There are many savings options children have nowadays. A few examples are Junior ISA, Easy-Access savings accounts, and regular savings account.
I will be going through the advantages and disadvantages of each later in the article.
A children’s savings account is a great way of separating your child’s money from yours. It also helps you know estimate how far you have come or need to go.
You can open these accounts with as little as £1 but they all vary in their functionalities. Some accounts allow your child to withdraw anytime they like while others have limitations.
Children’s Regular Savings Account
With a regular savings account, you can save an amount every month for a given period. This is best for parents who want to save for something specific like future tuition fees.
Children’s Easy-Access Savings Account
Depending on the account you choose, the maximum age ranges from 15-20 years old. With this account, your child can withdraw or deposit money as they like.
Pros:
- You can make withdrawals at any time.
- Great for teaching kids about money. Some accounts give you passbooks that your kids can use to withdraw money. They can only use it with a parent present.
Cons:
- Lower interest than regular or fixed-rate accounts.
- The account is tax inclusive.
You can get more information on children’s savings account on Which? and MoneySavingExpert.
Junior ISA (Individual Savings Account)
This is for children under the age of 18. The account is automatically converted into an adult cash Isa once they turn 18. They will then be able to manage the funds themselves.
Pros:
- Tax-Free: All money held in Isa wrapper is free from tax.
- Children cannot withdraw the money. This can also be a disadvantage if you want them to learn good money habits.
- You can choose between Junior cash ISA or Junior stocks & shares ISA. You can also choose to split between both.
Cons:
- There is an annual deposit limit.
- Junior ISAs have no government contribution.
Piggy Bank
Piggybank is very popular in all parts of the world. In fact, it is probably the first bank many of us knew growing up.
But what many didn’t know is that piggy banks are not just about saving money, it is also a great way to teach kids about money.
It is great for teaching children that money is valuable when kept and it grows over time when kept safe.
You can start by teaching your kids to save their spare money or loose change in a piggy bank. You can then attach a bit of responsibility to it. For example, you can tell them to get weekend treats for themselves from the money they have saved up throughout the week.
This is a very important lesson.
It helps them realize that saving money is towards a specific purpose and when it’s gone it’s gone. That you do not save up for the fun of it. Piggybank can help children develop an understanding of how money works.
Find out how to bridge the gap between the rich and the poor here.
Friendly Society Tax-Exempt Plan
A friendly society is a mutually beneficial association created for the intention of pensions, insurance, cooperative banking, or savings. The purpose is to be advantageous to the members.
Many Friendly Societies have tax-exempt savings plans and many offer the children’s version of this.
You can pay into the plan for 10 to 25 years.
During your chosen duration, the money is invested in a share-based investment fund.
The annual maximum you can pay is £270. You can pay up to £300 if you can commit to £25 each month.
There are a couple of conditions to meet before the maturity date. Your child must be at least sixteen to access the fund. You must have also funded the account for at least ten years.
So far as you continue to service the account for the minimum amount of years, your child won’t be eligible for Capital Gains or Income Tax on any income.
NS&I Premium bonds
Premium bond is an investment plan offered by National Savings and Investments (NS&I).
It differs from other savings and investments because you don’t earn interest or dividend income. Instead, they enter £1 from your invested amount into a monthly prize draw.
You can earn between £25 and £1 million from these draws. According to statistics, every year one in every three people win a prize with a £1000 investment.
The winnings are also tax-free.
The minimum amount you can buy is £25 while the maximum amount you can hold is £50,000.
You can buy Premium Bonds for yourself, your child, your grandchild, or your great-grandchild. But you must be at least 16 to be able to buy them.
HM Treasury backs Premium bonds so your money is secure.
A major disadvantage is that you might not win any prizes.
Children’s pensions
Yes, you can think long-term and take a pension for your child. Saving towards your child’s retirement isn’t the most regular thought process but the idea is great.
Surely it won’t be the first savings option you thought of.
Children can access the money only when they reach 55 years of age. Let’s be honest, anyone facing retirement will be grateful for any savings they can get.
Pros:
- Your child’s latter years are well secured monetarily.
- Children can take over the account and make pension contributions themselves when they reach 18. This teaches them great financial habits.
- Your child can’t spend the money lavishly because it’s inaccessible till retirement.
Cons:
- The money will be inaccessible for a long time.
- The maximum yearly contributions are small if you want to be eligible for tax-relief funds.
- The pension income is not tax-free, unlike ISA accounts.
Who can open these accounts?
- The provider and savings account option you choose usually decides this.
- Instant access and fixed-term bonds can be opened by children over 7 years.
- Junior ISA, instant access, regular saver, and fixed-term bonds can be opened by parents or guardians.
- Instant access, regular saver, and fixed-term bonds can be opened by grandparents or other family members.
- Some fixed-term bonds can be opened by your child from the age of 7.
- Stock and shares account can only be opened by parents or guardian.
How can you open these accounts?
You can open these accounts in three ways. It can be done online, in a branch, or by post.
You can only apply online if you already have an existing account with the provider. If this is not the case, you may visit their nearest branch to you. You might also need to provide identification for yourself and your child.
A child’s identification is usually a passport, proof of address, or birth certificate.
