Finance is usually an uncomfortable topic to discuss; but when our children are involved I believe it should be compulsory. It’s important that we as parents instil healthy financial habits in our children i.e. saving, investing and giving.
My Background My parents are immigrants from Nigeria. Upon their arrival in the UK they had to make ends meet and keep their heads above waters by doing menial jobs. At that time they had no formal qualifications, investments nor savings to hand down to me per se. All they could do was raise me to a satisfactory standard and hope for the best. Fast forward to today, I’m the first generation to go to university, obtain a post qualification, and have a professional career. I don’t say this to boast in any way shape or form, but to put what I’m about to write into perspective.
Financial Habits I think I am a natural saver. I suspect I got this from one of the quotes my dad used to recite to me as a kid “son the way you lay your bed, so you must lay on it”. This has helped me prepare for the future (although the future is not certain). The fear of overspending and having nothing to stand on moved me to be prudent and save. I’ve managed to continue this habit throughout my working career, especially whilst I was still at home. I read various books to help me increase my financial discipline; the big one for me was The Richest Man in Babylon, particularly chapter five “The Five Laws of Gold”.
“Son the way you lay your bed, so you must lay on it”
I think I’m the type that is content with the basics and doesn’t need much to be happy, which I suppose helped me remain consistent in my savings and financial planning (I did fall short on a few occasions). Don’t get me wrong I’m not suggesting you save 100% of your salary every month! I still managed to enjoy life by traveling, night outs with friends and a couple indulgences here and there. But I would use that as a reward mechanism to treat myself and most importantly my spending would be within my means!!! “cutting my cloth according to my size”. I am fully aware that my daughter may well have a different personality than mine, nevertheless I still think it’ll be necessary to teach her this skill set; as it’s not taught in school. I believe building wealth is a mindset.
One of the ways in which we’re planning on giving our daughter and future kids a financial head start is by opening a Junior Individual Savings Account (JISA) for them. Why JISA? 1. Tax efficient: Any increase/growth to the child’s investment is free of UK tax. Tax rules are subject to changing and the benefits depend on circumstances. 2. Generous Allowance: You can invest up to (at present) £9k each tax year. 3. Long-Term: You are not allowed to make any withdrawals until the child is 18 years of age, allowing sufficient time for the investment to really grow! This is key to building wealth 4. Easy & Simple: Once the JISA has been set up (by Parent(s) or Guardian(s)), anyone can contribute to this thereafter.
I will now show three examples on how a child’s JISA can potentially grow depending the on the level of risk you (as the parent or guardian) are willing to incur for them. I am not a financial advisor, so please seek professional advice, or conduct your own research if necessary.
Assumptions Remember the tax free allowance is £9,000 a year; however for illustrative purposes we will be assuming £1,000 per year (or £83.3 per month) for 18 years. £1,000 per year for 18 years (£1,000 x 18 years = £18,000 invested)
Example 1: JISA Example At a low growth rate of 2% for 18 years: £18,000: Total we would have added over the 18 year period (£1000 x 18 years) £1,241: This is the estimated growth over the period @ 2% £19,241: My daughter’s JISA could be worth this
Example 2: JISA Example At a medium growth rate of 5% for 18 years: £18,000: Total we would have added over the 18 year period (£1000 x 18 years) £7,435: This is the estimated growth over the period @5% £25,435: My daughter’s JISA could be worth this
Example 3: JISA Example At a high growth rate of 8% for 18 years: £18,000: Total we would have added over the 18 year period (£1000 x 18 years) £16,076: This is the estimated growth over the period @8% £34,076: My daughter’s JISA could be worth this
Please note: These examples do not show what my child’s investments will actually be. I am fully aware that investments can go up as well as down too and my daughter can get back less than we put in for her.
We opened up a JISA for our daughter with Hargreaves Lansdown PLC and opted for a moderate rate option. As aforementioned please seek professional advice or do your own research and figure out what works best for you. Remember Personal finance is personal because it depends on circumstances to each person.
So.. Where am I going with this? By the time a child hopefully reaches 18 they can potentially have a minimum of £19,241 at their disposal (as per the above assumptions and calculations). They can decide to: ⁃ Upgrade to the Adult ISA at 18 and continue to grow their investment pot for the foreseeable future ⁃ Pay for their tuition fees if they decide to go to university; minimising their debt ⁃ Contribute to their deposit for their first home ⁃ Startup a business / Real Estate investing ⁃ And do much more They may have multiple options at their disposal, something I didn’t have to this degree. I’m not bashing my parents for this, I’m very thankful to them and I understand that their circumstances were very different.
Final Thoughts The Junior Individual Saving Account is not the only way we can build wealth for our children, there are many other options available for creating wealth for them. You may well decide to do something else rather than the JISA route.
What ideas do you have in mind?
Until next time. K.