Compound Interest Savings...
Discussion
A quick question...
Talking to a good friend this morning, he wants to set up a savings account as a kind of "nest egg" for his kids when they are older (at the moment, they are two, and six months, so there's plenty of time
) and he was asking me what I thought the best route was.Asking me for financial advice, is a lot like asking a veteran alcoholic about a wine tasting menu.
He is looking for something where the compound interest can build up over the next 18 to 20 years, with a small monthly amount (circa £50) being funnelled into it, but he wants it to be separate from his other finances and not easy to "dip into".
He already has a maxed out ISA, so my suggestion was literally a savings account at a bank he doesn't currently bank with, a standing order for the £50, and cut the cash cards up (if they have to have one) when they arrive, and then forget about it.
I suspect this is a terrible idea - so can someone tell me a better idea so I can tell him?
Sterillium said:
Talking to a good friend this morning, he wants to set up a savings account as a kind of "nest egg" for his kids when they are older (at out ISA, so my suggestion was literally a savings account at a bank he doesn't currently bank with, a standing order for the £50, and cut the cash cards up (if they have to have one) when they arrive, and then forget about it.
I suspect this is a terrible idea - so can someone tell me a better idea so I can tell him?
I suspect this is a terrible idea - so can someone tell me a better idea so I can tell him?
You are correct, that it is indeed a terrible idea.
One of Warren Buffett's quotations explains:-
"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially."
A thought for your friend.
Last year I gave a 2 year old, some shares in Compass Group plc. Will gradually gift stakes in other businesses, to gain risk spread. The youngster does not know, but income is being received, and already at a higher rate than a savings account would produce.
It might become a worthwhile 'pot' in 20 years time.
My son is a bit lucky compared to me. He has a pension an a junior isa, he is only 4. I wasn’t keen on the Junior ISA as when he turns 18 he can just spend it as he sees fit. So I thought I would give him a head start on a private pension. Off course pension rules change but at present the government is putting 20% in addition to my contribution so I am happy to take that and let compound interest work. It’s self managed SIPP and although I am investment illiterate I managed to get a 7% growth last year with is not great but I am happy with it beating inflation. It’s incredible how the pit just grows almost 5 figures already.
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hstewie said:
hstewie said: If I was looking for a quick simple solution that didn't need too much thought or management I'd probably just go to Vanguard and open a Junior ISA and chuck it in a world tracker or LifeStrategy 80 or 100.
^^^ This.Holding cash for an 18 to 20 year period is probably going to give the lowest returns and actually lose money to inflation.
essayer said:
What are the options if you don’t want to open a pension but also don’t want a Junior ISA? assuming personal ISA limits are reached (I wish!)
Firstly, a Junior ISA is nothing to do with your personal ISA limits, it is the kids allowance in their own right.A GIA (General Investment Account) is the other option as it is going to need to grow to a very decent size before any tax is payable anyway.
NickCQ said:
Maxed out as in he's already putting in £40k pa (his & wife's)?
Surprised he needs advice on personal finance if he has the discipline to do that.
Hmm... I'm not 100% sure - and this might be me losing something in translation - but I think he has an ISA sat with £20k in it, and his wife has the same. I don't think they do anything with them other than let them sit there.Surprised he needs advice on personal finance if he has the discipline to do that.
Sterillium said:
Hmm... I'm not 100% sure - and this might be me losing something in translation - but I think he has an ISA sat with £20k in it, and his wife has the same. I don't think they do anything with them other than let them sit there.
£20k is the annual contribution limit, not the total limit.And as I said above, Junior ISAs are separate and in addition to this annual limit.
Ah, so the Junior ISA is a different entity entirely, and can coexist with his ISA?
And when he described his ISA as "maxed out" he's actually got the wrong end of the stick then? Does this mean an ISA can have an unlimited amount of cash in it, as long as you don't add more than £20k in one (tax?) year?
Sterillium said:
Ah, so the Junior ISA is a different entity entirely, and can coexist with his ISA?
YesSterillium said:
And when he described his ISA as "maxed out" he's actually got the wrong end of the stick then? Does this mean an ISA can have an unlimited amount of cash in it, as long as you don't add more than £20k in one (tax?) year?
And yes.Sterillium said:
Ah, so the Junior ISA is a different entity entirely, and can coexist with his ISA?
And when he described his ISA as "maxed out" he's actually got the wrong end of the stick then? Does this mean an ISA can have an unlimited amount of cash in it, as long as you don't add more than £20k in one (tax?) year?
Yes.And when he described his ISA as "maxed out" he's actually got the wrong end of the stick then? Does this mean an ISA can have an unlimited amount of cash in it, as long as you don't add more than £20k in one (tax?) year?
A Junior ISA is truly theirs though it's in their name and can't be accessed until they turn 18 so even then it wouldn't count towards his limits.
It’s worth pointing out that Junior ISA’s have good cash interest rates (to get kids, and their parents) hooked on brand names.
Coventry BS offers 3.6% for their cash JISA, it’s 1.75% for adults
So if they aren’t the sort to take investment risk then the returns can be tolerable.
Naturally rates may fall, but when you have a poster self managing and getting 7% (which doesn’t say if pre or post fees, and could easily be in neg territory in 2020 with the Iran thing), and you can have half that with no need to worry, well, I personally think it’s worth a thought.
Coventry BS offers 3.6% for their cash JISA, it’s 1.75% for adults
So if they aren’t the sort to take investment risk then the returns can be tolerable.
Naturally rates may fall, but when you have a poster self managing and getting 7% (which doesn’t say if pre or post fees, and could easily be in neg territory in 2020 with the Iran thing), and you can have half that with no need to worry, well, I personally think it’s worth a thought.
essayer said:
So if you don’t want a JISA, you don’t want to use your own ISA allowance, and you don’t want to start a pension for them - what longer term savings options exist?
Other than child cash savings accounts etc
A standard General Investment Account (GIA) with the provider of your choice.Other than child cash savings accounts etc
You can access the same investments as you could within an ISA, JISA and pension/SIPP, just without the additional tax benefits.
You can also use their tax allowances on any income/gains, so the pot would have to become a very chunky size before there was any tax to pay anyway.
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