Guest post by Jim from Money Blog Scotland
If you are the parent of a newborn or young child you will no doubt have your hands full!
It’s a wonderful time. I’m a dad of three myself and whilst they’re all growing up fast, I can still remember the early days well.
An awful lot is going on and with the sheer level of mayhem happening in your home, your child’s distant financial future may be the last thing on your mind.
However, you could be missing an open goal. because when your child is very young is a great time to start putting some money to one side for them.
At birth, a child has 18 years or so before they enter the adult world, and this is time that could be leveraged to make a fantastic thing called compound interest work to your and your child’s advantage.
The figures below have been calculated using this Compound Interest Calculator. Why not try it yourself using your own amounts.
What is Compound Interest?
In a nutshell, it’s earning interest on interest. instead of interest earned being paid out, it is reinvested back into the account which gains further interest on top of it.
Also referred to as compound returns or compounding, it is a fundamental part of banking and economics. Over time in a long term savings or investment product such as a junior ISA or a child’s savings account, compound interest can be your best friend and grow your savings.
Don’t believe me? here are some examples below
£10 Per Month Savings
Let’s say you want to put away £10 a month for your baby so that they can access it when they are 18.
If you stuff £10 a month under your mattress, by the time your child reaches 18, they will have the grand sum of £2,160 tucked away.
However, let’s say you want to put your kid’s money in an investment account. and the investment grows by on average, 5% each year.
on their 18th birthday, your child would be sitting on £3,507.
That’s an increase of £1,347. Which equates to 62% more cash for them to do whatever they want with.
£50 per Month and a £5,000 Gift From Granny
However, let’s move things up a notch.
Granny has been kind enough to give junior a very generous gift of £5,000 at birth. and mum and dad commit to the larger monthly premium of £50.
Again if the whole lot is stuffed under a mattress or left to linger in a zero interest rate bank account, the amount after 18 years would be £15,800 or thereabouts.
But what happens if the money is invested in an account returning 5% annual growth over the piece?
The final amount when your child turns 18 is £29,808. An increase of £14,008 or 89%. Which means you could almost double your money by doing practically nothing. apart from of course opening an investment account for your child.
Provider Charges and Inflation
The above is just a general snapshot to illustrate how compound interest works. all the figures are accurately calculated but certain elements have not been taken into account such as charges and inflation.
Charges can play a big part in long term investment accounts and it’s something you should look out for when taking out any savings or investment plan.
For instance, a plan which returns 5% growth per annum would have its figures reduced to 3.5% if the provider charges were 1.5% (a common charge for ISAs and Junior ISAs).
And you can see from the illustrations above how big an effect just one or two percentage points can have on the final payout figure.
I hope you have found this short guide useful. I am not a financial adviser and do not offer advice and this article is for information purposes only.