With Christmas fast approaching, talk is likely to soon turn to the must-have present that your children desperately want.
Of course, the sad thing is that, by next Christmas, the chances of them still playing with that must-have present are rather slim.
So, why not think outside the box this Christmas and buy your kids the best present you possibly could? Something that could set them up for a more financially free and flexible life as a young adult: a Junior ISA.
Compounding
Clearly, when it comes to investing, the more time you have to make your money work, the harder it works for you. So, by setting up a junior ISA when your children are still young, you are maximising the potential return of your investment simply because it has a long time to compound and generate even greater returns.
For example, say you set up a junior ISA when your child is five years old and you invest an initial 100, and then invest 25 every month until they turn 18. Thats a total investment of 4,000 over 13years.
Clearly, it is a known unknown as to what the total return will be on the amount invested and, moreover, it will largely depend upon how much risk you are willing to take. Lets say, though, that you invest in a diverse range of blue-chip shares that generate a total return of 9.7% per annum, which is the annualised return of the FTSE 100 since 1985. Minus fees of say 0.5% per annum, that means a total return of 9.2% per year.
Over the course of a 13-year period, this annualised return would be enough to grow your total investment of 4,000 to a portfolio worth 7,634. Clearly, inflation will mean that this will not be worth as much in 13years as it is now, but it still provides evidence of the power of compounding (and investing) over a relatively long period of time.
The Practicalities
It goes without saying, of course, that the earlier you start, the more you invest, and the more successfully you invest, the larger the lump sum when your child becomes an adult. And, it must be noted that when your child turns 18, they will take legal ownership of the ISA (it rolls into a normal ISA) and can do as they see fit with the money you have built up for them. Furthermore, they are able to take control (although not access the money) from the age of 16.
In terms of how to go about opening a Junior ISA, the process isnt too complicated, nor is it particularly time consuming. They are offered at a wide range of financial institutions and you can invest up to 4,000 per annum at the present time. Friends and family can make contributions and you can set up a direct debit to make regular contributions, or invest lump sums.
Best of all, though, you can choose from a wide range of shares through which to build up a tax-efficient nest egg from which your child can invest in their education, pay a deposit on a house, or travel the world. If you’re looking for ideas on which shares to invest in then a good place to start could be a free guide from The Motley Fool called 5 Shares You Can Retire On.
The fivecompanies in question offer a combination of high dividend yields, long term growth prospects, and trade at attractive valuations. As such, they could make for sound long term investments and maximise total returns over a sustained period of time.
Click here to obtain your copy of the guide – it’s completely free and comes without any further obligation.
