Last week I was writing about how to pay for kids’ college, and the realisation that a) I am off track compared to my previous budget and investment planning and that b) there are a lot of ways to financially plan for your children’s future. As ever, this is complicated if you are a single parent and trying to balance the prorities around just keeping it together versus building foundations for the future you want for your family. And it’s complicated if you aren’t living/working/planning for college in one country.

But I wanted to come back and talk a bit more about saving for kids and some of the options and thought processes.

Before all of these processes, ensure that your kids are financially literate. Having them engage with the household spend and planning, understand that paying for one things rather than another is a choice, and managing their own pocket money, really builds them into adults who can make good decisions. Ideally we also raise them to be kind, smart, caring individuals who don’t get sucked into corporate BS and are mindfully contributing to the world, but I’ll have to let you know how I get on with that one.

Another post on this coming soon.

1. Just start saving something, as soon as you can

Even a piggy bank works. Getting into the habit of saving small means that the reflex grows as your child gets older. There are better ways to invest the money, but an early focus on the saving part will help as you work out additional options.

2. Think about whether there are others who might save for your children

For me, my parents paid £10 per month into a savings account for each of my children between birth and five years old. It’s not a lot, but it’s what they can afford and it still represents £600 per child. They are also of the generation / mindset that doesn’t believe in generational wealth in the way that meant they would look at their grandchildren and focus on this kind of thing, but lots of people feel differently. So it might be worth exploring, especially if you have family who are in the habit of giving generous birthday or holiday gifts which might be better split into savings.

My kids have never been gifted money, so whilst there is lots of advice about putting this into savings, it really depends if it’s coming your way in the first place.

3. Think about risk, and decide whose name you are going to save in

This step comes before investing. There are great children’s accounts which can act as investment vehicles but your child will be able to access these usually at 18. So you need to work out what the risk is of them getting that money at a time in life when – let’s face it – lots of people will make poor decisions. Taking the example of saving for college: if I put the savings element into an account which reverts to them at 18 and they choose to spend that money on a sound system / gap year / bitcoin or whatever, and take huge student loans, I can’t stop them. I can refuse to put in place additional support (and can sit around with my head in my hands wondering what I did wrong as a parent) but I can’t solve for it.

In the USA, saving into a 529 account fixes this problem by offering savings specifically in a child’s name, but which can only be spent on college. American FIRE folk have a lot more to say on these, but as far as I know they only exist in the States.

The flip side of risk is if you save in your own name, but either you make poor decisions (listen, at 43 I am totally aware of my own fallabilities) or you have the kind of emergency situation that means you use the money. Ideally you can mitigate against such risks with other elements of your portfolio, but the point of risk-based thinking is to look at all the possibilities before they happen.

3. Harness the power of compound interest by investing

So the great thing about investing for children is the long time frame means that compound interest is real. If you put £25 a month into a savings account paying 2.45% from a child’s birth until they turned 18, they would have £6,775 by the time they could access the account. However, investing that same amount in an index fund and it grew at 4% per year they would have £8,000 when they reached adulthood after charges. And it’s possible to be more hopeful – with the 20-year average of the S&P500 coming in at 9%, the possibility could be a lot more. And comparing to the atrocious 1% savings rates we’ve seen in the past few years (recognising this is changing) investment seems to be the best option.

4. Be tax efficient, and don’t get caught up with high fees

Almost all countries have a way of saving for children which has tax breaks. In the UK, Junior ISAs (Indivdial Savings Accounts) are the best option, since you can choose savings or stocks and shares accounts both of which have a tax wrapper which protects any gains. You can also split the annual maximum contribution to a JISA of £20,000 across the two types if you want to split your risk, and any adult can contribute.

There are different fees and options for investments which change, so it’s worth shopping aorund for the best. In the UK, moneysavingexpert has an up to date list with easy to understand comparisons.

5. Think about long term futures

I’ve written about my own pension issues many, many times, and with this in mind I also opened pensions for my children. In the UK there is a Junior version of the Self Invested Pension Plan (SIPP) in order to give them some minimal comfort so they don’t end up making career choices out of paranoia that they’ll be broke old people.

There are incredible benefits of compound interest for a J-SIPP, given that the money basically has 65 years to compound, and remains tax free regardless of growth depending on how you withdraw it. You can only pay in £3,600 per year, which attracts 20% tax relief. For me, I only started doing this when I have the other bases covered adequately and it remains a tiny portion of savings and spend in our household.

But paying in £25 per month from birth through til 18 means you contribute £5,400 in total but with 5% growth, this will be worth about £30,000. So it’s not All The Money In The World, but it makes me feel more confident in how I can support their whole lives. At 18, the SIPP rolls over to them as an adult, and they can continue to contribute, but not withdraw money until retirement.