Karen Watson-Brown, dental Specialist Financial Adviser at Wesleyan Financial Services, shares savings habits that will pave the way for your children’s future…
As a dentist, the legacy that you have built over the years may be something you wish to share with your children during your lifetime, giving them the gift of a strong financial start to their adult lives.
When it comes to securing your child’s future, one of the most impactful financial moves you can make is starting a savings plan early. While the concept of building a “nest egg” for children is straightforward, its power lies in the timing of when you begin. The first pound you save for your child has the potential to generate the most money over time, thanks to the power of compound interest and early investment.
Here’s how you can build a strong financial foundation for your children…
Why the first pound matters most
The key to growing a significant nest egg is compound interest—the process by which you earn interest on your initial investment, as well as on the accumulated interest from previous periods. Compound interest can be instrumental when building long-term wealth, especially for your children’s future.
The first pound you save is the most crucial because of the principle of time. In financial terms, the earlier you start saving, the longer your money has to grow, and the more you may benefit from compound interest.
Consider that if you start saving for your child’s future from birth, with £100 invested per month with a medium 5% investment growth rate, it could grow exponentially, reaching £34,920 in 18 years.
If you were to start saving later and over a shorter period, say £100 a month over five years with a medium growth rate of 5%, your potential return may only be around £6,801. Compare these figures and the importance of when you save that first pound is clear.
Please note that these figures are an illustration only. They do not take into account any personal circumstances or product or advice charges. Keep in mind that investment values are not guaranteed and can go down as well as up, so you could get back less than you invest.
Saving for your child’s future from birth or early childhood allows you to build wealth over decades. Even if you only add small amounts over time, the power of compounding can transform that small seed into a substantial sum.
While starting early is the most important factor in building a nest egg, contributing regularly to the savings plan will accelerate the growth of the fund. Small, consistent contributions can quickly add up, especially when combined with the power of compounding. Whether it’s setting up a monthly standing order or making one-off contributions, consistent saving makes a big difference.
Where to build the nest egg
There are several ways to build a nest egg for your children. Choosing the right savings vehicles will depend on your goals, risk tolerance, and timeline. There are a few avenues to consider.
A Junior ISA is a tax-efficient savings account specifically designed for children. You can open an account for your child and contribute up to a £9,000 annual tax limit. The money grows tax-free, meaning you won’t have to pay tax on any interest or capital gains.
With a Junior ISA, your child can access the money when they turn 18, but in the meantime, it can potentially grow effectively thanks to compound interest.
You may consider a trust for your children. Trusts give you control over your assets and how they’re distributed. They’re often easy to set up and they have many uses, for instance, holding assets for a minor or for tax purposes. Trusts are particularly suited to organising funds for beneficiaries who would be too young to be able to look after and manage the assets themselves.
For those with a higher risk tolerance, investing in stocks or mutual funds can offer the potential for greater returns. While this comes with the risk of market volatility, starting early gives your investment time to recover from potential downturns and benefit from long-term growth.
If you’re not comfortable with investing in the stock market, a regular savings account for your child may be a simpler, safer option. Though the interest rates may not be as high as other investment options, the funds are still growing, and you have access to the money whenever you need it.
A pension might sound like an unusual choice for a child, but opening a pension account early can provide tax advantages and allow your child to benefit from compound growth over several decades. Though it is less flexible in terms of access, a pension can offer a substantial, tax-efficient nest egg by the time your child reaches retirement age.
Speak to a specialist
Building a nest egg for your children is one of the most powerful financial gifts you can give them. With time on your side, the small steps you take today can lead to substantial rewards in the future.
If you would like help setting up a financial plan for your children’s future, you can book a financial review with a dental Specialist Financial Adviser at Wesleyan Financial Services by visiting wesleyan.co.uk/dentists or calling 0808 149 9416.
Please note: Tax treatment depends on your individual circumstances and may be subject to change in future.
Charges may apply. You will not be charged until you have agreed to the services you require and the associated costs.
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