I have a two-year-old daughter and would like to start saving for her future. When should I start doing this, and how much should I be setting aside?
Bonds and offshore plans could ensure child's future
Q) I have a two-year-old daughter and would like to start saving for her future. When should I start doing this, and how much should I be setting aside? Are there specific plans I should be looking at? A) When it comes to investing, the saying "the earlier the better" definitely applies. The earlier you start the less you will need to contribute on a regular basis to reach your goals, as compound growth and/or interest over time can make a significant difference to the ultimate sum.
The amount you should set aside will mainly depend on budget and how much you can afford each month or year. What you should invest in depends on your priorities and the state of your finances. Some parents like to invest for important milestones in their children's lives such as 18th or 21st birthday, marriage or a contribution towards a first home. But I would also suggest that parents save towards the cost of education, as tertiary education in particular can be very expensive. The gift of a good education may prove to be the best investment in the long term.
While keeping monies on deposit is a popular option, this should not be the only home for savings. Currently, the interest rates in most deposit accounts are lower than the rate of inflation, so in real terms the capital value is eroded. National Bonds are a popular alternative in the UAE. If investing for the long term, anything over five years, then you can consider a structured investment plan which invests in a range of managed funds.
Most plans will offer access to cash, bond, equity and property funds and a good independent adviser will assist with the right choice of underlying funds based on the required time scale, attitude to risk and economic climate. A plan that offers flexibility in terms of increasing premiums is useful as you may wish to set aside more if there is more disposable income, or you want to use the plan to provide for other children that come along.
If times get tough, it is good to have a plan that will allow you to reduce or suspend premiums without penalties, although this is often not an option in the first couple of years due to the impact of initial charges. The ability to continue making contributions no matter where you are living is important, particularly for expatriates who tend to move from country to country. This is particularly relevant if you happen to move before the end of the 15 years plan you have set up as generally you need to maintain premiums until the end of the term to obtain maximum value for money.
For this reason plans run by offshore insurance companies are best for most people. As these tend to be run out of the Isle of Man (UK), investment protection schemes also apply which is another benefit. If the investment is to cover school fees, for example, you must ensure that it is possible to make withdrawals at future dates without penalty.