Declan Harrington is a Financial Advisor at Savage Silk, a multidisciplinary practice that specialises in legal, insurance, finance, and investment advice. In this article, he takes a closer look at how you can make a financial contribution to your child’s future without the risk of spoiling them.
When you become a parent, your child becomes the main focus in your life, so it’s little surprise that they want to care for them in every way possible, including financially. However, with the best intentions often come the biggest mistakes, and some people fall into the trap of doing too much. Unfortunately, there is the risk of spoiling children, which can have far-reaching consequences on the rest of their lives, even playing a major role in shaping who they become as adults.
Thankfully, there are ways that you can provide financial security for your child’s future without the risk of spoiling them rotten. By taking a careful approach to their upbringing and making wise decisions about where to invest into their future, you can take a path that ends with a young adult who doesn’t have to worry about what’s around the corner but still recognises the importance of hard work.
Teach them the value of money early
Part of our role as parents is to make sure that we prepare our children for what’s to come their way in life, and one of the biggest things they need to learn about is how to manage their money. While you probably don’t want to jump straight into pensions and the stock market with them, imparting some basic financial sense at an early age is absolutely essential.
For many children, the first time they have to begin thinking about finances is when they are given pocket money. You can set them on the right path to becoming a saver in later life by saying no to their requests for a toy or game, instead encouraging them to keep their cash until it grows enough for them to buy it themselves. This will also help them to learn about delayed gratification and resisting impulse purchases.
Instilling a strong work ethic in children
As children grow into teenagers, their wants tend to get more expensive. Requests for toys here and there turn into weekly trips to the cinema or eating out with friends, and pocket money simply won’t cut it anymore. Instead of just raising their allowance, you can encourage them to go out and find a part-time job when they are old enough. Experiencing a working environment can be character building, and when they get their first wage, they will feel a sense of accomplishment. This can help to instil a strong work ethic that will serve them well later in life, as well as developing their budgeting skills early.
Wealthier parents might be tempted to go down the route of creating a trust fund for their kids, which will allow them to draw an allowance as soon as they are 18. As a financial advisor, I try not to encourage parents to set up something like this. Not only are there many tax disincentives attached to trust funds, but they can often provide too much of a feather bed when children, as young adults, should be learning to stand upon their own two feet. These types of funds tend to breed complacency in young people, especially when they are aware that they have a personal safety net. If you want to invest in your child’s future, it’s better to look towards options that are more constructive.
Investing in their future
When it comes to choosing the right kind of investment in your kids’ future, there are quite a few options to explore. You can set up a regular children’s saving account with a bank or building society, which your child can begin to manage from age seven to enhance their saving skills. There are Junior ISAs which are tax efficient and locked up until they are 18, and stocks and shares ISAs which are much the same but have more potential to grow (or shrink). There are also children’s bonds that are bought in batches and have a five-year fixed interest rate. Each batch has a new interest rate set after each cycle.
One of the best investment that you can make for your child is in their education. Depending on your stance on the value of private schooling, this may be something you invest in early on, but there will certainly be the opportunity to contribute if they wish to move into further education. The cost of attending university has increased a lot over the last ten years, with fees at many universities increasing to £9,250 per annum, with every indication they will continue to rise every year thereafter A financial contribution can allow graduates more freedom, and lift the burden of years of repayment into their twenties and thirties.
Not having to worry about debt after university can also allow your child to study in an area they really want, removing any pressure to pursue a qualification that leads to a high-paying job. This can be particularly useful if they want to go into something like nursing or teaching, which doesn’t always reward professionals with a large salary.
Leaving a legacy for their later life
There is also the possibility for you to leave a legacy for your children that they will only be able to access when they are 55. Investing in a pension fund for your kids might sound ridiculous, but when you look closer, it presents an opportunity for a life-changing investment.
Firstly, relatively small investments early on are subject to the same tax reliefs as other pensions, and when you couple this with compounded growth over many years, the amount will increase quite dramatically, especially if your child continues to invest once they become an adult. It’s a very tax-efficient way of passing assets on through the generations, while also encouraging them to work. Secondly, making such a contribution for the latter part of their life can remove much of the financial worry for the future they might experience throughout their years, which is a fantastic gift to give.
So, there you have it, some essential steps that you can take to provide for your kids’ financial future without spoiling them. Take them into consideration and they are bound to have a bright future.
