Saving for children is a subject on the minds of many parents and grandparents and one that can be somewhat of a minefield. Whether it’s to support university costs, towards a first car, a home or even looking ahead through pensions, starting early can make a significant difference. Here are some key aspects to consider when saving for children.

Firstly, setting up a savings account for a child provides a dedicated space for accumulating funds. Many banks and building societies offer children savings accounts, often with minimal fees and attractive interest rates. By establishing such an account, parents can foster a habit of saving and introduce their children to basic financial concepts. This not only helps them learn about money management but also instills a sense of discipline regarding saving and spending.

If you’ve read previous blogs of mine, you’ll know I’m a big fan of ISAs. There is a Junior ISA, available for children under 18. Similarly to adult ISAs, any interest or gains are tax free, and you can have a cash or stocks and shares JISA. An important consideration for higher earning parents is that if, in the tax year, the child gets more than £100 in interest from money given by a parent, the parent will have to pay tax on all the interest if it’s above their own personal savings allowance. For higher rate taxpayers, this is £500, or £0 for additional rate taxpayers.

Junior ISAs can’t be touched until the child is 18 so careful consideration needs to be made as to the goal and timings for potential withdrawals.

Teaching children about the importance of saving is equally valuable. Engage them in discussions about financial goals, the concept of earning interest, and the benefits of delayed gratification. If they receive pocket money, you could consider matching (to a degree) what they save, essentially boosting their saving. This hands-on experience not only imparts practical financial skills but also fosters a sense of responsibility and independence.

Additionally, investing for a child’s future can potentially yield higher returns compared to traditional savings accounts.

Power of compounding

Furthermore, consider the power of compounding when saving for children. Compound interest can significantly boost the value of investments over time, and the earlier contributions are made, the greater the impact. By starting to save when a child is young, even modest contributions can grow into a substantial nest egg by the time they reach adulthood.

What is your goal?

An essential aspect of saving for children is having a clear goal in mind. Whether it’s saving for education, a first car, or a home, defining the purpose of the savings can guide the investment strategy. Knowing the specific financial needs and timeline allows for a more tailored and effective savings plan.

As children grow older, involving them in financial discussions and decisions can be beneficial. Explain the basics of budgeting and involve them in setting goals for their savings. This not only enhances their financial literacy but also makes them more accountable for their financial decisions.

It’s also important to periodically review and adjust the savings plan as circumstances change. Changes in family income, expenses, or the child’s needs may necessitate adjustments to the savings strategy.

What should you consider?

In conclusion, saving for children is on one hand, easy – open an account, contribute and you’re done. Equally, what’s the money for? Is the child learning about financial responsibility, and basic financial concepts such as interest. Starting early, utilising tax-advantaged accounts (i.e. JISAs), and incorporating investment strategies are key elements in building a solid financial foundation for a child’s future.

There is also the consideration of your own financial needs and goals. I would not advocate saving for a child, if you’ve got little or no savings for yourself and whilst building savings for a child when young, is beneficial for the longer term, the financial security of the family must be a priority.

Thanks for reading and enjoy the journey!