How to future proof your kids’ financial future

This article on your kids’ financial future comes courtesy of Long Weekend from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

Generation Alpha parents – those with kids born between 2010 and 2025 – need to get creative. Based on the traditional adult measures of success, our kids are screwed. They face monster student debt, job insecurity, and house prices to the moon.

Excelling in the school system may or may not pay off. Taking a job is being replaced by the entrepreneurial making of a job. Kids will need to cultivate a toolkit of strategic thinking and collaboration skills in order to solve new world problems in novel ways.

I don’t know about you but I was not familiar with this language – let alone the principles – until I entered the workplace.

In this brave new world, sitting down to plan your children’s accompanying money blueprint will never be time wasted.

Here are three ideas1 for building your kids’ financial future.

1: Open a Junior ISA

The Junior ISA limit is now a generous £9,000 a year. That is a punchy number to fill every year, especially if there are siblings.

However let’s say you were able to put in the maximum from birth until your child(ren) hit 18 years. They would then leave school with a pot of £350,000, based on a 7% growth rate.

These kind of sums are only achievable by investing in the stock market via a stocks and shares JISA. In contrast, with a cash JISA your child will probably end up with less money than you invest in real terms, due to inflation.

Once you have overcome the first hurdle of saving £9,000 per child, you hit the second JISA challenge.

In the words of Gandalf the Grey “with great (investing) power, comes great responsibility”.

Your kids’ financial future in your hands

As the parent or guardian, you have a limited time window to positively influence your children’s financial literacy and hence your kids’ financial future.

They can access their JISA money in their late teens. Before then you’ll need to impart your hard-won wisdom on delayed gratification, saving for something special, giving to worthy causes, the power of compound interest, and budgeting.

They are not going to learn this stuff at school. It’s on you.

Regular automatic investing into a stocks & shares JISA sets your children up for success on their next adventure. That could be university, starting a business, or a deposit for a house. They will have money to put to work.

If you are new to investing, a JISA is a great training ground for buying and holding for the long-term. Once invested, only the junior recipient can access the funds on turning 18. This removes your ability to withdraw and hopefully the temptation to sell or tinker.

How to set up a Junior ISA

Estimated admin time: 1 hour

Select a low-cost broker from Monevator’s broker table. I choose Charles Stanley Direct. Open the account online. This requires proof of ID and you’ll need to set yourself up as the nominated contributor to pay in funds.
Choose a low-cost fund, with global exposure. Do you own research but for ease take a look at Vanguard Lifestrategy 80% (accumulation). Invest a lump sum, or select monthly payments.
Save your the log-in details in LastPass. Then forget about the account, at least until the next tax year.

2: Open a Junior SIPP

My mum scoffed at me setting up a Junior pension for my daughter. The timeline of 60-plus years seemed meaningless. My mum argued that by the time my daughter could access the pension, she’d have her own money.

I see it differently. A Junior Self Invested Personal Pension (SIPP) is a wise investment.

Firstly, as with an adult pension, the government pays tax relief on a kid’s pension. This is the equivalent of 20% free money from the Government.

Parents or guardians can can pay in £2,880 and this is topped up to £3,600 per year. I will always take free money from the Government, thank you very much.

Secondly, the power of compounding works best on a long-time line. Sixty years is about as long as it gets!

Use the Monevator compound interest calculator to get a sense of what’s possible. An investment of £3,600 x 18 years, which is then left to compound2 (no further contributions) until they are 60-years-old would give your precious a pension pot of £2.2million, from an initial investment of £50,000.

That is not a typo.

Admittedly £2m will be worth a whole lot less in 60 years. But it’s still a very generous patronage.

I plan to only tell my daughter about her family-funded pension when she’s established herself both personally and professionally. Imagine being told, aged 35-40 year, that there is money put aside that will allow you to pursue your passions, pay off your mortgage, and invest in your children’s and grandchildren’s future!

I’ll need to wait a long time to be proved right. That said, I’m feeling pretty bullish.

How to set up a Junior Pension

Estimated admin time: 1 hour

As per the ISA, select a low-cost broker. For the purposes of diversification and protection from Internet hacking, choose a different provider. For example Best Invest. Its pension performs well in terms of low fees
Again, choose a low-cost fund, with global exposure. Given the long investment timeline, you might help your kids’ future by choosing an ESG fund, too. Vanguard’s own ESG fund saw returns of 34% over the last 12 months. This growth isn’t sustainable (excuse the pun) but it proves that ESG investments needn’t inevitably compromise returns.
It will take roughly a month from investing to receive the extra Government 20% (max £720) into the account. Set a reminder to invest that, and then forget it until next year

3: School of Life investing

We’re witnessing explosive growth in DeFi (decentralised finance). If my child were in their late teen and obsessed with Roblox, Fortnite, and Axie, I would be tempted to set them up with a little money in an account, subscriptions to newsletters such as Real Vision and The Defiant, and suggest they put their metaverse skills to work.

With supervision, it’d be a fun, gamified, way to learn about returns, lending, and yields. It also flexes their research skills. It will help them find authentic and knowledgeable voices for advice. Most significantly, Defi is your kids’ financial future. It will impact their work, money and investing, communications, and ownership. Starting this learning journey early is only going to help.

In her coming secondary school years years, I also intend to gift my daughter roughly £1,000 to set up a business during the summer holidays.

Again, the learning curve is huge, from selecting a product or service, learning how to sell, problem solving, managing a budget, branding and IP.

I’ll be rooting for what she creates and hope her business succeeds.

But in this instance the journey will be more important than the destination.

In time you will be able to see all Long Weekend’s articles in her dedicated archive.

I’m not an accountant or financial advisor. I’m a mum who’s educated herself on personal finance. Please do your own research and make your own investment decisions.
This is based on the assumption that the annual investment of £2,880 remains the same for 18 years with an annualised return of 7% per year.

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