Honey, I Shrunk the Kids’ Savings

Kids' savings

Savings

Julie Hutchison

10th February 2014 at 12:50pm

I’m a firm believer in the philosophy – it’s never too early to start saving and putting early building blocks in place when it comes to your kids’ financial future. I was keen to see how others approached this and asked a work colleague who I knew had already started down this route.  It was really insightful to get her point of view, and to hear her thoughts and concerns.

I thought it might be worth sharing her experiences with you as they may resonate and hopefully put to bed some of your fears or concerns.

Making a move

Last year she persuaded her husband to move money they were saving for their two young sons from a Cash ISA to a Stocks and Shares ISA

She convinced him that, as they were saving for the long term (her boys are aged 2 and 5), it was the right decision and they’d probably be better off.

She was well aware that investing in stocks and shares is riskier than having money in a cash savings account. The stock market on the other hand tends to outperform savings rates and inflation over the longer term. However, if interest rates continue to lag behind inflation, the money she was saving for the boys will be worth less in the future than it is today.

The stock market on the other hand tends to outperform savings rates and inflation over the longer term.

In it for the long term

Given their plan is not to touch the money until the boys turn 18, they agreed to take their chances that the stock market will ultimately be the winner.

All very sensible and rational.  She was however concerned when she opened her first year’s ISA statement recently to discover her balance is now less than it was a year ago.  She was disappointed and felt a little guilty as this was her sons’ money and she felt she’d effectively lost some.

Keep Calm and Carry On

But there lies the point.  She’s investing for the long run so does the first year’s performance really matter?

She’s not a terrible parent and investing in a Stocks and Shares ISA to save for her children is absolutely a sensible thing for her to do.

I pointed out to her that it’s worth noting just how well the stock market has done over the long term. If you had invested in a fund that tracks the UK stock market between November 2000 and November 2013, you would have received an 80% return before charges during this time.* For example, if you had invested in a fund that tracks the UK stock market between November 2000 and November 2013, you would have received an 80% return before charges during this time.*  Not bad considering this period includes part of the dotcom crash and the 2008 banking crisis.

Don’t confuse a marathon with a sprint

Whilst I know that past stock market performance is not necessarily a guide to what will happen in the future, this gave her some reassurance. She was also able to allay her husband’s concerns, he was all for taking the money out and moving it back to a cash account.  But since they have over a decade ahead to save, it’s more of a marathon than a sprint.  And to take the money out now would have been rash before it had a good chance to gather some momentum. When the finish line is a good length off, it’s well worth pacing yourself.

*The FTSE All-Share Index grew by 80.4% from November 2000 to November 2013, including dividend reinvestment. Source: Financial Express.

The information in this blog is not financial advice.  A Stocks and Shares ISA is an investment.  Its value can go up or down and may be worth less than you paid in. 

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