By Lindy Du Plessis.
For parents, it’s tough enough getting children up and running each morning. So, turning your attention to their needs years down the line – rather than the stream of immediate ones – is a big ask. But think of them you should, because sticking your head in the sand won’t help. I’m not all doom and gloom though! Small steps now can, over time, turn into great strides when it comes to saving for your children’s future.
Research commissioned by my company last year revealed that three-quarters of UK parents recognise that their offspring will need more financial support in early adulthood than they did themselves. The reasons: heftier university tuition fees, steep property prices and rising living costs. Meanwhile, parental expectations have never been higher. Almost everyone surveyed expected at least one of their kids to pursue further education. Yet despite such aspirations, in practice parents often don’t have the right financial plan in place to help them with the mounting expenses that go along with them.
Of course, money can’t buy happiness, but according to the research, parents place a huge importance on their children’s future financial well-being and clearly feel that being over-burdened with debt has the potential to overshadow everything else. In fact, financial struggles and debt are seen as a bigger threat to their kid’s future than an unhappy marriage or making the wrong career choice.
Financial goals for your kids can seem intimidatingly large. University tuition fees alone are £9,000 a year and likely to rise. Unsurprising then that students are finishing their studies nowadays with debts averaging more than £44,000.
How about helping them get a foot on the housing ladder? The average price paid for a first home in the UK has topped £200,000. So even if your child can secure a mortgage, a 20% deposit alone works out more than £40,000.
And the list doesn’t end there. Weddings, driving lessons, gap year travel and a whole lot more can cross the financial radar of parents. This begs the question, what should us parents do about it?
If you haven’t set much (or anything) aside yet, don’t panic and don’t feel guilty! Your love and attention is much more important than money could ever be. But if you are willing and able to do something financially for your children, here are two tips…
- Risk has an upside
Putting money occasionally into a cash savings account is unlikely to generate a nest egg big enough to cope with the financial challenges children potentially face in early adulthood. As such, parents should seriously consider equity-based investments to give their children a good financial start.
Unlike cash savings, shares can fall in value which opens up the prospect of losing money. But historically at least, shares have produced higher returns over the long term.* Of course, I should add that past performance is not a guarantee of future results.
I think it’s a shame therefore that Cash Junior ISA accounts outnumber Stocks & Shares ones more than two to one. In the 2014/2015 tax year, 365,000 people had active Cash Junior ISAs vs 145,000 Stocks & Shares ones.*
However, it’s important to remember that equity investments aren’t suitable for everyone and certainly not if you’re investing over the short term. They aren’t usually recommended unless you can commit to investing over at least 5 years, ideally longer. For shorter time scales, saving cash is the best option.
- Little and often
If you do have a bit of a runway, one simple and effective investment strategy is to invest regularly, month in, month out. Don’t fret about the scary-sounding sums looming ahead. Just concentrate on what’s possible to do now. For example, can you realistically set aside £100 a month?
Remember, nobody is saying you somehow are obliged to cover the full cost of university or a home deposit. Helping out, even in modest amounts, is better than doing nothing.
If you are investing a fixed amount each month, your cash will buy fewer shares in a month when the market is riding high and shares are relatively expensive. That doesn’t sound great, but then again in a month after the market dropped, the price of each share is less and you will acquire more of them. This is significant because it drags down the average purchase cost of each share.
What’s more, you will (hopefully) get into the habit of investing and may even be able to increase the amount you set aside each month later on. Who knows, in a few years, your future self might look back and be pleasantly surprised by your current self’s foresight!
There is no silver bullet, and no guarantees, but for those parents who can afford to do so, putting money away regularly into a long-term investment, like a Stocks and Shares Junior ISA, is a great way to build a decent pot of money to give children the financial boost they need in the early stages of adulthood. And it’s never too late to put something aside, even if it’s in a cash savings account. Every little helps.
*Source: Orbis research with Research Plus Ltd, Barclays Equity Gilt Study 2015
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Lindy du Plessis is a member of the Orbis team of investment counsellors with a focus on institutional clients and consultants in Europe. She has an MBA from INSEAD and is a Chartered Financial Analyst. This article was written on behalf of Orbis Access, the online investment company.