Personal finance tips and advice on money and investing to increase your financial intelligence and welfare

Financial advice and planning for your children’s future

If you have children then you will want them to be as financially secure as possible when they grow up. What is the best financial advice for parents looking to the future?

The global financial crisis and ensuing economic downturn have left many people wondering what kind of legacy they are leaving for their children. Soaring government overspending means that we are passing on huge debts to the next generation of taxpayers. What is the best financial advice for our children, and how can we reduce the disadvantages stored up for them over the last few years?

Financial advice and education

The best investment for your children is education – both general and specifically financial. Education has enormous benefits in terms of financial wellbeing, as well as for other areas of life. Studies have shown that every additional year of education brings an 8 percent rise in average lifetime earnings. Beyond this, the financial advice you give your children early in life is critical.

For some reason, although schools have to teach maths, they typically do not teach budgeting or financial planning. This seems bizarre, since it is one of the most important real-world applications of maths that pupils will consistently encounter after leaving school. If they are not given this basic level of financial advice and training at school, make sure they get it at home. Involve them in the household accounting to whatever degree appropriate, teach them about budgeting and how to manage their money, and make sure they know about compound interest.

Financial advice for parents

Parents are able to save for their children in tax-efficient ways. Although the Child Trust Funds have been abolished, there are other options available such as ‘Baby ISAs’. These allow you to save on behalf of a child, and the interest on the investment is not taxed – just like a regular ISA. Your child gains access to the ISA at 18, as they would with a CTF. This is where education comes into financial advice: at 18, your child can do what they want with the money. Make sure you have instilled some good habits in them before you hand over the details to their new account! You may want this fund earmarked for college or university. Ultimately, though, it is going to be up to them what they spend it on. If you have any doubts, it might be best to choose an investment that stays in your name until you’re sure about passing it on.

It is worth remembering that – all things being equal – the longer the lifespan of an investment, the more disproportionately it will grow. If you leave £1,000 in an investment account yielding 5 percent for 18 years, it will have grown to £2,400. The same sum over five years will total just £1,280. It’s therefore good financial advice to start early. Small sums of money can grow significantly over time. Adding small amounts little and often to your child’s investment will make a much bigger difference than waiting until you can afford more and putting in a larger sum later.

Pensions

Financial advisers often talk about the importance of starting a pension early for this reason: it’s far more economical to pay smaller amounts of money in and have the full benefit of several decades of compound interest than to wait until middle age, when you might be earning more.

Perhaps one of the most unusual pieces of financial advice for your children, then, is to start them a pension. There is no reason not to do this on their behalf. You can pay in small amounts of money – perhaps only £25 per month – and know that compound interest could easily turn this into £1 million by the time they retire 70 years later. They can take over the payments at 16 or older.

If you’re worried about the economic situation we are leaving for our children, this is one piece of financial advice that might give you – and them – peace of mind.

This article was supplied by FSA regulated financial advisors SG Wealth Management who serve individuals and organisations throughout Norfolk, East Anglia and the south-east.