The Rich people’s secret
Did you know that the average debt among the cohort of borrowers who finished their courses in 2019 was £40,000. House prices are rising, education becoming more expensive, we as parents are terrified about our children’s future. I don’t have a spare forty grand to pay the university fees and living expenses for my kid. Many of you have little money either.
If I were to say to you, you could offer your offspring a present of £40,000 for their 18th birthday. You will laugh at me, I am certain. I will spell out my theory in a second.
What is Junior ISA, and why every youngster should have it?
I am positive you have seen loads of movies where a youth receives funds as they turn a certain age, usually a substantial chunk of money. Actually, the story is close to the truth. A decade back, the UK government introduced a Junior ISA. ISA is a tax wrapper that protects any gains accumulated in the account from the taxman. Junior ISA has a 9k a year allowance.
Say you get enough money and can max it out for 18 years in a row. The child can walk away with £380,000 by the day they hit 18. Just to bring it in perspective, an average working individual earns 511k in their lifetime — “In 2018, the average lifetime earnings of men were £643,000 while those of women were £380,000.”
You can laugh now. I don’t have a spare 9k! Obviously, I understand. I don’t have either. Putting away 9k a year per kid is possible only to wealthy ones. But you follow my point. It is not impossible to provide your children with 380k of tax-free money by the time they are 18.
Now let’s speak about the more realistic scenario.
How can you offer your youngster £40k for their 18th birthday without investing a penny of your own money? The answer is the same — Junior ISA.
If you were to commit from month 1, your baby is born till they are 18, an amount of £84.6 a month. £84.6 is the current Child Benefit you can claim from the state. The money would compound over 18 years and result in a sum of +/- £40,000. Below are the compound interest calculations projections using £84.6 as the initial balance and the same sum as a monthly contribution for the next 18 years.
Not only parents can add to the Junior ISA. Your family can, too, as long as they are UK residents. That £200 annual check from the great grandma for the precious birthday can add £8,5k over 18 years to the pot. And so on.
Parents who make under 50k (individually) can receive the child benefit. For example — one individual may earn 30k another 40k. You can claim the benefit. I am sure you can live a comfortable lifestyle on a 70k annual pre-tax income. Just don’t dine out the child benefit. Put it towards your kid’s future.
Imagine choices the fund will enable your son/daughter to have. Go to university without stressing about getting a loan. Put a deposit for their first property. Travel the world. Open the business. Whatever your kid wants to do, they will have their own 40k tax free available the day they reached 18 years of age.
Technicalities
To achieve average 8% growth, you would need to use a Stock and Shares Junior ISA. Cash ISAs currently have minimal return.
The first step is to choose the provider. There are plenty of options from Vanguard and Fidelity to Hargreaves Lansdown. Look out for the fees, though; they can vary.
Please be aware all the money you deposit on the Junior ISA legally belongs to the Child named on that ISA. You cannot take funds out unless the listed owner is deceased, then you can inherit them. Basically, you say goodbye to the cash every month, with no possibility to draw it out. Which I think is an excellent option.
A friend of mine started saving money in a similar account, but under her own name for her boy. When he was 10, she had around 10k. By the time he was 12, she had financial difficulties and just cashed it out. He is 21, works in food delivery to get by while pursuing higher education. Imagine how different his life could be if she had no access to the fund.
In my case, I am divorced, and I use the monthly child maintenance money to deposit into the Junior ISA. Some months when I have more expense, I will not deposit or deposit less.
Important point
The crucial point is to educate your children financially. Make them money literate and improve their financial IQ. Otherwise, you can end up in a sticky situation, when the 18 years old spends all on a dream car or designer clothes.
Start the education early. Explain what tax is and how it functions. What a balance sheet is and how to run one. Money in, money out. Define what liabilities are and what are assets. How to make money work for you, not you work for money. Sensible kids will listen, learn and implement.
Final thoughts
I was lucky to study for free in my city, living at home. I never had a student loan. My catch-22 situation was the house deposit. It took me years to save for one. If I had such a present, I would be grateful forever.
It does not really matter if you contribute 10, 80 or 200 pounds a month towards your children’s future. As long as you do it consistently and utilise a tax wrapper, the capital will accumulate and eventually kick-start the junior’s life.
10 pounds a month can grow to 4,8k by the age of 18. This should be sufficient to get a second-hand ride, insurance, and petrol for the next 12 months. Use the compound interest calculator to carry out your own projections.
Ludi F
This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
