Hundreds of thousands of anxious students and parents across the UK will have been awaiting the results of GCSEs and A Levels over the last few weeks. For many parents these two memorable days serve as a timely reminder of the importance of education.
Whether it is the cost of music lessons, school trips or driving lessons the cost of raising children hasn’t ever been cheap and this is before considering private school or University fees at £9,000 or over per year. For those who want their children to continue their studies to degree level and beyond, contributing to the fees and the cost of living for those years of study may be essential.
Few people could afford to pay this large sum as a one off expenditure, particularly if there is more than one child to consider. However starting to save a regular amount when your children are young is often more affordable, but also makes better financial sense than saving a big amount later in life. Why? Because of the effect of compound interest. When you save in a savings account it earns interest which is added to the account periodically. Generally, the next time interest is calculated, it will be based on the balance of your savings (which will include previously added interest). This is known as “compound interest” and allows your cash savings to grow at a faster rate because the interest itself will earn further interest.
Investments are slightly different. The amount of money you have in your fund will depend on the success of the investments, as opposed to savings which often have a set level of interest.
However, whilst those investments are successful and make some gains, the compounding effect still applies.
Whether saving or investing is a better option will depend upon a number of factors, including the length of time before which you will need the money or how you feel about taking any risk with your money. Over the longer term (5 years+), investing can achieve a greater return than saving (particularly when interest rates and savings rates are low) but it involves taking some risk as to whether the value of the investment will rise or fall.
Financial planning for large expenses in the future can be a good way of focusing your approach. When children are very young, you may decide that they don’t need presents from wider family members, and instead you may invite grandparents or aunts and uncles to make a donation to their savings. By setting up a way to save now, you are able to offer this as an easy route to investing for your child’s future.
There are many different ways to save for the longer term and part of the choice that a parent has here is control. Where they are happy allowing the child access to the money when they go off to university, there are accounts and investments that can be set up in the children’s names. Otherwise, the parent will take out an investment themselves and earmark it for the children’s education.
If you would like to find out more about the effects of compound interest or investing for the future, get in touch we’d love to help.