There are important things to consider if you want to invest for your child. For example, what age to start investing, what investment strategy to adopt and whether you should get your children involved in picking stocks and funds. We will now go through the key points.

The average cost of raising a child in the UK from birth to 18 is £69,621 for a couple and £113,102 for a lone parent, according to data from the Child Poverty Action Group. This rises to £157,562 and £208,735 respectively if housing and childcare costs are factored in.

Your child may rely on you for money well into their adult lives, so the more you can do now to prepare for this, the better.

WHY SHOULD YOU INVEST FOR YOUR CHILD?

The most common question you should begin asking yourself as parents is why should you start investing for your child?

One simple answer is to help them pay for life events once they are an adult, such as university fees, buying their first home or getting married. Even before your child turns 18, they may need money for driving lessons or a vocational course.

The cost of going to university

Tuition costs

Universities in England, Northern Ireland and Scotland can charge students from England up to £9,250 a year for undergraduate tuition.

For accelerated degrees (which are completed in less time) English universities can charge up to £11,100. The most Welsh universities can charge is £9,000 a year.

To pay these fees, you can apply for a loan of up to £9,250 (or up to £11,100 for an accelerated degree) from Student Finance England. This will cover your university’s tuition fees in most cases. Otherwise, you will have to find the cash elsewhere – hence why saving for your child’s education can be a good use of your spare money.

Student accommodation costs

The average amount students pay for rent in the UK is £535 per month. A student studying at a London university may pay the most rent. With an average bill of £865 per month, UCL turned out to be the most expensive university for accommodation – 1.6 times more than the national average.

WHY START INVESTING AS EARLY AS POSSIBLE?

There are many benefits of starting investing for your children early. The main one is you can invest for a longer timeframe. For example, investing at birth means you have 18 years before they become an adult to build up wealth.

You might want to invest in riskier assets which may generate greater returns as you will have plenty of time to ride out the ups and downs of the stock market.

‘A parent and/or guardian must think first why they are saving for their children and what is the purpose of it. Is it to buy something in the short-term or the longer term?’ says James Norton, head of financial planning at Vanguard.

WHERE SHOULD YOU HOLD YOUR CHILDREN’S INVESTMENTS?

A Junior ISA is a great starting point as any capital gains or income from investments inside this account are tax-free. You can pay up to £9,000 a year into a Junior ISA. The child can take control of the account when they are 16 years old and they can withdraw money from age 18.

Just remember the money inside the Junior ISA belongs to the child so there is an element of trust that the funds will be used for the original investment goal.

Case study 1: Investing for Alistair

Parents Suzy and Jim have chosen to put away £100 a month into their Junior ISA for their new-born son Alistair. Assuming 4% annual return, by the time Alistair is 18 he could have more than £31,000 to go towards a deposit for a home or to pay for accommodation costs at university.

Case study 2: Investing for Felicity

Penelope and Brian are able to use the full £9,000 annual allowance for the Junior ISA which they have opened for their new-born daughter, Felicity. By the time Felicity is aged 18 she will have much more than Alistair at £250,000, based on 4% annual gains.

WHICH IS MORE POPULAR: CASH OR INVESTMENTS FOR JUNIOR ISAS?

Parents are increasingly choosing to invest for their children through Junior ISAs than just sticking it in cash, according to Laura Suter, head of personal finance at AJ Bell: ‘Cash Junior ISAs have continually been more popular, as parents either don’t want to take risk with their child’s savings or lack the confidence or time to invest. However, that finally is changing,’ she says.

‘Parents are still more likely to open a cash Junior ISA account, with 60% of those paying into a Junior ISA putting money in a cash account in 2021-22, but that’s a significant fall from the 70% seen the previous year.’

According to the latest data from HMRC, there was £859 million held in Junior ISAs in the 2021-22 tax year and £631 million in cash. However, more cash accounts were being actively used than stocks and shares ones. In the tax year, money was put into 737,000 Junior ISA cash accounts versus 475,000 stocks and shares Junior ISAs.

SHOULD YOU INVOLVE YOUR CHILDREN IN INVESTMENT DECISIONS?

If you’re putting money away for your child, getting them involved in the decision-making process can help them to forge a good saving and investing habit at a young age, which should hopefully continue for the rest of their life.

According to a study by the London Institute of Banking & Finance, when young people were asked about where they get their financial understanding from, two thirds (68%) said that most of their financial understanding and knowledge came from their parents, up from 56% last year. Only 8% cite school as their main source of financial education, which is a significant drop from 15% last year.

When asked at what age they’d like to start learning about money: 52% said between the ages of 11 and 14, 27% said between the ages of 15 and 18, and 16% said 10 and under.

One of the positives of getting your children involved with investment decision making is the fact that you are giving them a financial education ‘by stealth’. But it depends on your child’s age. There is no point discussing the benefits of Junior ISAs with pre-school children as they might struggle to grasp the concept.

Another positive is that it encourages children to be financially responsible and more financially aware of companies they use on a daily basis, for example Netflix (NFLX: NASDAQ) or Google-owner Alphabet (GOOG:NASDAQ).

James Norton, head of financial planning at Vanguard, says: ‘There aren’t personal finance courses in most schools and therefore if a parent or guardian does open a Junior ISA for their child then it is a good opportunity to start educating them about money.

‘If you are in a broadly diversified index fund, you can own most of the largest companies in the world. Telling children they own a tiny piece of Tesla, for example, is a way of engaging them in the topic.’

One of the negatives of getting your children involved with investment decision making is that they might not fully understand the concept of long-term investing. They might become frustrated that they are not instantly seeing a return or have access to the money.

They might also disagree with your investment choices, and it could cause strain in the family.

Whatever you choose to do as a parent it is important to make your children aware of investing, saving and other money matters which will affect their future.

How much do I need for a house deposit?

The average deposit for first-time buyers is £62,470 according to Halifax, almost double the UK’s average annual salary, with people typically putting down around 20% of the purchase price of their property.

A typical UK property costs £286,532 as of May 2023 (compared to £286,662 in April).

Source: Halifax

WHY DOES THE INVESTMENT TIME FRAME MATTER?

It’s a fact of life that raising a child can be expensive and many parents find they cannot afford to put aside any money until their son or daughter is a teenager. After all, many parents work and need to pay for a childminder or nursery when their child is young.

Fortunately, it’s never too late to start saving for your child. You just need to think about when the money will be needed. For example, your child might be 16 years old and an adult in two years’ time. Is it worth bothering saving for them now? Yes, it is.

The plan might be to give them some money to help buy a flat when they’ve finished university and are in full-time employment.

Realistically, you’re probably looking at a point when they are in their second or third job before their salary is sufficient to be able to pay monthly mortgage payments and to pay for all the other bits that come with owning a property. That might be when they are in their late 20s at least, which means a potential investment time horizon of 10 years or more if they are 16 now.

In this situation, investing in a selection of equities (stocks and shares) would be one route to consider – you might find it easier to put money into funds containing a portfolio of equities rather than pick individual companies.

WHERE TO INVEST ON A SHORT TIME HORIZON

What if the investment timeframe was much shorter, such as two years? In this situation, putting money into shares is risky. Just imagine if the stock market went through a bad patch a year before your child needs the money – it might take more than 12 months for the market to recover. For a two-year horizon, cash might be a better option, certainly in the current market where you can get a decent return on your money in the bank.

Investing in a mix of bonds and equities might be more suitable for a three to five-year investment time horizon. Consider a multi-asset fund or an income fund that invests in high quality companies, reinvesting any dividends along the way.

How much does it cost to learn to drive?

The average cost for learning to drive is £1,551, according to the RAC.

WHERE TO INVEST ON A LONGER TIME HORIZON

If you have five years or more, you should focus on equities as history suggest they provide the biggest return versus bonds and cash. At the simplest level, a global tracker fund might suffice. For example, iShares MSCI World ETF GBP Hedged (IWDG) looks ideal for someone looking to invest their money for their child over at least a five-year period. It has a 0.3% annual charge.

This tracker fund will provide you with exposure to large and medium-sized companies across 23 developed market countries. It would mean your child owns a slice of Apple (AAPL:NASDAQ), Microsoft (MSFT:NASDAQ), Amazon (AMZN:NASDASQ), Nvidia (NVDA:NASDAQ) and much more.

Put another way – your child might use an iPhone, they like playing on an Xbox, they watch films on Amazon Prime, and they’re fascinated by the rise of artificial intelligence. By owning this fund, they should benefit from the success of companies behind these products and services.

Investors happy to pay a small fee to a fund manager to try and beat the market might want to spread their money across a few funds or investment trusts as well as the iShares tracker fund. Smaller companies have historically delivered strong returns over time – while this part of the market has been out of favour for the past few years, now might be a good point at which to get exposure while prices are lower.

T Rowe Price US Smaller Companies Equity Fund (B82YBL3) has achieved 13.8% compound annual returns over the past 10 years, according to FE Fundinfo. That is ahead of the 11.6% annualised returns from the MSCI World index, which is the backbone for the iShares tracker fund.

While there is no guarantee it will continue to deliver such strong returns, the T Rowe Price fund looks a good choice for someone with at least a five-year investment horizon.

It provides exposure to both growth and value-style stocks, and its portfolio currently includes Waste Connections (WC:NYSE) which helps to keep America’s streets clean, Ingersoll Rand (IR:NYSE) which supplies air compressors for various industries including body shops and food production, and Vulcan Materials (VMC:NYSE) which produces the materials used to pave roads across the US.

DISCLAIMER: AJ Bell is the owner of Shares magazine. Daniel Coatsworth, who edited this article, owns shares in AJ Bell.

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