It’s that time of the year when Santa leaves gifts under the tree. As well as presents to unwrap, your child may receive money from family and friends too. If they receive cash as a gift, they may be eager to spend as soon as possible, but putting it away can help it go further and teach valuable money lessons says Chris Hughes, Independent Financial Adviser at Pembroke Financial Services.
Despite families cutting back ahead of Christmas 2020 due to the Covid-19 pandemic, a YouGov poll estimated that the average person spent £883 on Christmas. Presents made up the bulk of the expenses, adding up to £408. With presents making up a big portion of Christmas expenses, it’s likely your children will receive plenty of gifts from loved ones. So, what are your options when deciding what to do with the money they may receive?
Let your child spend it
Spending the money is probably what your child would choose to do. While you may be eager for them to save it, there are benefits to letting them hit the shops too.
Chris said: “Spending money they receive as a gift can provide children with valuable money lessons. From understanding the value of items to handling money, spending can be useful for getting to grips with finances. If there’s nothing they want right away, adding the money to a child current account can help them take control and start thinking about why they should leave money to spend in a few weeks or months.”
Place the money in Premium Bonds
If you’d like to save the money for a later date, Premium Bonds are an option worth considering.
Chris explained: “You can place up to £50,000 in Premium Bonds for children. The money is secure, and you can withdraw it at any time. This makes it a useful option for short-term savings. However, unlike a savings account, the deposit won’t earn any interest. Instead, there is a monthly prize draw that could mean your child wins a lump sum. The prizes range from £25 to £1 million and are all tax-free. Of course, there’s no guarantee that your child will win a prize, and more people receive nothing than win.”
Deposit the money in a savings account
Opening a savings account can put the money to one side while still providing flexibility. In a savings account, the money will be earning interest, but you can still dip into it to pay for treats or other expenses.
If you want to build a nest egg for a child, a Cash Junior ISA (JISA) can be a good option. The interest rates offered are usually more competitive than a standard child savings account and the interest earned is tax-free. For the 2021/22 tax year, you can place up to £9,000 each year into JISAs for each child. However, the money won’t be accessible until the child is 18, at which point they can withdraw it, or it will convert into an adult ISA. As a result, a JISA may only be suitable if you want to save for the long term.
The drawback with cash savings is that interest rates are likely to be lower than the rate of inflation. This means that the savings will lose value in real terms. If you’re saving for a long-term goal, inflation can have a significant impact.
Invest the money for long-term goals
While saving in cash can seem like the “safe” option, savings can fall in value in real terms due to inflation. If you want to save the money for the long term, investing is something you should consider.
“All investments do carry some level of risk, but they can also provide an opportunity for the money to grow at a faster pace than inflation. If you’re saving for a goal that is more than five years away, considering the impact of inflation is important, and it could mean investing makes financial sense for you,” Chris added.
When investing, you need to consider what level of risk is appropriate for your goals, time frame and more. If you’re unsure what level of risk is appropriate, we can help you.
Again, a JISA is an effective way to invest on behalf of your child. A Stocks and Shares JISA will mean investments can grow free from tax. As with a Cash ISA, you can place up to £9,000 into a Stocks and Shares JISA for the 2021/22 tax year and the money, including investment returns, will be locked away until the child is 18.
If you want to start a nest egg that can give your child a helping hand as they become independent, a Stocks and Shares JISA could help.
Starting a savings account or investment portfolio for your child can give them more freedom when they reach adulthood. The deposits you make now could be used to help them buy their first car, get through university, or even buy a home. If you want to create a plan for building a nest egg for your child, please get in touch.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.