How to make your child a millionaire – or just start investing for them

Tax year end is approaching. So, it’s a good time to do a mini financial audit, and maybe tick off some of those tasks on your financial to-do list. For many parents, one such task will likely be putting away money for their child or children. It’s something we all mean to do, but often put off in favour of other tasks (hello Netflix binging).

We’ve all heard the old mantra of putting your own oxygen mask on before you do your child’s. And the same applies to saving and investing. You want to make sure you’ve got your own emergency pot in place, got the cash savings you need, and started investing for yourself and got your pension sorted, before you start putting away money for your child.

Then, assuming you’re in that tip-top position, you could look at opening an ISA for your child. You’ve got two options here: to open a Junior ISA, or to put the money in your own ISA. And there are some pros and cons to both routes.

Junior ISA or your ISA?

If you open a Junior ISA in your child’s name, you can put in up to £9,000 a year, sheltering it from tax. Anyone (including grandparents and family friends) can pay into the Junior ISA, which is locked up until your kid turns 18 – at which point it becomes an adult ISA.

Crucially, at this point they legally control the money themselves, and can decide what to do with it. Of course, everyone hopes to raise a sensible 18-year-old who’ll decide to keep their pot invested or spend the money on something useful. But equally, they could decide to splurge it on a week in Ibiza, and there’s not lots you can do about it.

More on Junior ISAs

If you fear your child may be the partying or splurging kind, your other option is to just save the money in your own ISA. It’s not as neat because the money isn’t ringfenced, and it also means you’ll have to use up some of your own £20,000 a year ISA allowance (a potential issue if you plan to use your full allowance each year)

But the advantage is the money will stay in your name and won’t come under your child’s control on their 18th birthday. Also, you can withdraw the money before they turn 18 – for example, to buy them driving lessons and a car on their 17th birthday.

More on Stocks and shares ISAs

So there’s not really a right answer – it’s up to you. You can open a Junior ISA all the way up to your child’s 18th birthday, so you can always change you mind later if you initially decide to go down the route of using your own ISA.

How much should I save?

Clearly this depends how much you can afford. But to give you an idea, we’ve done some sums to show how big an impact squirrelling away just a bit each month and starting early can have on your child’s future wealth. (All our calculations are based on getting 5% a year return from your investments, after any charges, which is broadly in line with what investment markets have delivered over the long term.)

The average student leaves university with around £50,000 in student loans and other debt, which provides a nice round number for parents to aim towards. To build a £50,000 investment pot by the time they turn 18, parents would need to put away £1,700 a year, or £142 a month, assuming they start from birth.

Another option is aiming to build a house deposit for your child – most 18-year-olds would love to be gifted the ability to get on the housing ladder. The average UK house price is now £268,349, which means you’d need £27,000 for a 10% deposit. To generate £27,000 by the age of 18, parents would need to put £925 a year into the Junior ISA, from birth. (However, anyone buying in London or the southeast will need more, as property prices are more expensive.)

But what if you don’t really have any spare cash left over each month? Everyone is tired of claims that if you give up your daily coffee you could be a millionaire, but if you can find one area to make cutbacks and instead funnel those savings into your child’s ISA, you could really boost their future wealth. Ditching one family takeaway a month, costing £35, and instead putting it into an ISA would mean your child has a pot worth £12,400 for their 18th – enough to buy a nice car and driving lessons, or pay for a very nice gap year.

Even if you managed to find £20 a month to cut from the family budget, for example by shopping around for cheaper home insurance or ditching a streaming service or subscription you don’t need, you could build a pot worth just over £7,000 by their 18th birthday.

What if your child is older – is it too late?

The first years of a child’s life are pretty pricey, as we’ve discussed, so lots of parents won’t have much spare cash. Any money you manage to save when your child is just a baby is most valuable – as it has the longest to grow – but you can still build a decent pot even if you start later.

When some of those initial costs fall away, you could instead put that money into an ISA. For example, the average cost of part-time childcare in the UK is £138 a week, or £7,176 a year, according to the Coram Childcare report. When your child starts school and you no longer need to pay for childcare, if you put those costs into a Junior ISA you’d save £133,500 by their 18th birthday. Even if you put away just half of the cost, you’d still have more than £66,700 saved by their 18th.

Another large cost for new parents is nappies. Estimates vary of just how much they cost, but around £400 a year for the first couple of years of their life is reasonable. If from the age of three (when you hope your child will be potty trained) this money was put into their ISA, you’d have just over £9,900 by their 18th – not to be sniffed at (unlike a nappy).

Even if you don’t start saving until they’re age 10 and put away £50 a month, you’d build up a pot worth almost £7,000 when they hit 18. If you increased that contribution to £150 a month, you’d have £20,850.

Can I make my child an ISA millionaire?

The short answer is that it’s very unlikely. If you contributed the full £9,000 a year into your child’s Junior ISA from birth, you would need to generate 17.15% investment returns every year in order to net your kid £1m by the time they’re 18 – a pretty tall ask. But that shouldn’t stop you trying!