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Abu Dhabi, UAEThursday 21 February 2019

How to build up a nest egg for your children's future

Saving $1,000 a month during the first 18 years of your child's would potentially accrue $350,000

A Cambridge University study into habit formation and learning in young children by behavioural experts found that adult money habits - both good and bad - were set by the age of 7. Mike Young / The National
A Cambridge University study into habit formation and learning in young children by behavioural experts found that adult money habits - both good and bad - were set by the age of 7. Mike Young / The National

With a little bit of effort you could make your child a millionaire by their forties - isn’t that something worth saving for? And perhaps, says one expert, it is worth starting right now, even if you don’t yet have any offspring.

A study by UK wealth manager Brewer Dolphin showed that saving £240 (Dh1,157) a month for the first 18 years of your child’s life could create a nest egg of £1,021,837 by 2061, when a child born in 2018 would turn 43. That means a total contribution of £51,840 by the parents, assuming the investment will grow by eight per cent a year.

Aiming to save a nest egg now for your child to enjoy in their forties is taking a very long-term view, but Sam Instone, chief executive of financial advisory firm AES International, says the key to saving for university expenses or helping your children onto the property ladder is simply “to start as soon as you can” in order to “harness the power” of compound interest. These are both goals your children will be looking to in their teens and twenties, soon after flying the coop.

If you started to save $1,000 a month when your child was born, a five per cent growth over 18 years would reap $350,000, he points out. But starting just five years later would mean having to save $590 more a month ($532,000 more in total) to achieve the same amount at 18.

And parents who wait until their child is 10 before they start that pot would need to save almost three times as much a month as the parents who started as soon as their baby was born. They would need to find $2,965 a month to accrue $350,000 by their child’s eighteenth birthday - meaning they would have had to find an extra $70,000 more during their eight years of saving than the parent who benefited from the extra years of compound interest.

Steve Cronin, founder of DeadSimpleSaving.com and a panellist on The National’s The Debt Panel, says he is already planning ahead to fatherhood. “I have a children’s education fund and I don’t even have children yet,” he says. “The earlier you start the better. And if you’ve left it late, even a little bit saved up will help.”

If you expect to save for 10 to 20 years, you will benefit most from compounding, he says.

“There are few greater things you can do for your children than to provide them with a good education, a good financial base for their future and a good understanding of how to manage their money sensibly.”

And after all, if they do end up in financial trouble in early adulthood, it will probably come down to you to bail them out anyway.

Get your own finances sorted too “so you don’t pass on bad attitudes about money” to your kids, he adds. A 2013 study into habit formation and learning in young children by behavioural experts at Cambridge University in the UK showed that adult money habits - both good and bad - were set by the age of seven, when children could understand the value of money and count it, what income is and planning, although they did not yet understand the difference between necessities and luxuries.

There are few greater things you can do for your children than to provide them with a good education, a good financial base for their future and a good understanding of how to manage their money sensibly.

Steve Cronin, deadsimplesaving.com

Saving for your children can be difficult in those early, expensive years, admits Mr Instone - particularly if one parent reduces working hours or the family is relying on a single income.

Ambareen Musa, chief executive and founder of comparison site Souqalmal.com, agrees. Children heading off to college is “purely a function of age”, she says, so you have a “finite timeline to work with”, meaning an early start gives you more time to reach your target.

But you must plan systematically, she warns, looking at all your financial goals claiming their share of your savings, such as buying a home or building a retirement nest egg. “You can’t look at it in isolation,” she says. “You have to strike a balance and allocate your savings carefully.”

There are many ways to save, she says, from investment plans to education funds to investment bonds, high-yield term deposits and savings accounts. But it is key to automate your savings then distribute them across different investments and account for market risk to avoid “coming up short” on your goals.

Souqalmal.com lists 12 children’s savings accounts, with the CBD Mustaqbali child savings plan paying the highest at three per cent, on a minimum saving of Dh250 a month over a plan term of five to 18 years.

Mohammed Qasim Al Ali, the chief executive of National Bonds, says saving for children gives parents “peace of mind”, as time “passes by quickly”. It recently launched a Child’s Education Plan to help parents in the UAE “build the foundations” to ensure their child “realises their full potential” by saving regularly in a “low-risk and highly secure environment” and includes takaful death and disability insurance.

For those considering the stock market, Mr Cronin says you should invest for at least five years and ideally more than 10, staying diversified across countries and sectors to reduce risk, and keep investing costs low.

The fees can reduce the power of compounding so he advises against buying education or retirement savings plans sold in the region, which “usually have high total fees”. If you invest yourself, you can keep fees under one per cent per year, he claims, “for little time and effort”. He recommends a low-cost, globally diversified exchange traded fund (ETF) such as Vanguard’s all-world VWRD.

A diversified ETF will get you the magic eight per cent return, he says, so $10,000 invested at birth will become $22,000 after 10 years and $49,000 after 20. Even just $100 a month will create a lump sum of $18,000 in 10 years and $59,000 in 20.

Over time, kids gently need to learn the value of money - that pretty much everything costs something and that it's important to save and make smart decisions about what to spend on.

If you are too strict or too generous with your children, you are storing up problems for them and you later in life. A child that had a monthly allowance and had to decide how to spend their limited budget is much more likely to take earning, budgeting and saving seriously when they graduate. They will also approach the Bank of Mum and Dad more sensibly - for help with major items and emergencies rather than lifestyle support.

It is “a challenge” to encourage children to save for themselves, says Mr Instone, as they “struggle with delayed gratification” and tend to live for today. But saving can be made fun, he says, with a money box or bank account to help them with big purchases such as a new bike.

Older children can be taught about shares and shown how to build their own portfolio – on paper. “This will teach them to become disciplined with money, and might even lead to more sensible attitudes, to saving and investing” says Mr Instone.

Involve older children in their setting their financial goals, says Ms Musa, teach them how student loans work and encourage them to pursue scholarships. After all, as Mr Cronin points out, if you can get your child investing $250 a month in their teens and early twenties, they will have already ensured they become self-made millionaires in their sixties.

Updated: February 20, 2019 04:09 PM

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