By Holly Mackay
Any parent who’s flown with their children will have been told to ‘fit your own mask first’ in the event of an emergency. There may be a parallel with this and how we think about money – do we sort our own affairs out first? Or focus on giving our kids the help we think they need?
After years of giving them the last slice of pizza and shelling out for new football boots as we wear the same old scuffed trainers, nature has primed us to put our children’s needs above our own. So looking after our own money, and saving for ourselves, can feel a little odd.
But it’s difficult to think about our children growing up in a world in which buying a house could be a pipedream, university is tinged with substantial debt, and the Covid-19 financial black hole will be around for a long time yet. However, there’s a school of thought which says we’re best equipped to help our children if we help ourselves out first.
Tax-efficient saving: ISA for me or JISA for them?
One savings option specifically for kids is an account called a Junior ISA (Individual Savings Account). Although parents or guardians have to set this up, anyone can pay into it – grandparents, friends of the family, anyone. We can save up to £9,000 a year into this account and any profits are largely tax-free. The disconcerting part for some is that our children can access this money from the age of 18.
On the one hand, it’s a great option for setting aside a little every year in preparation for uni, a first car or a helping hand on the property ladder. On the other hand, we could all just as easily save intoour own ISAs - up to £20,000 a year and a tax-efficient way to save - keeping control of the money ourselves. We can then see how generous we feel when they turn 18, and how responsible they are by this age, before we decide if they’re ready for our financial help or how much we can really afford to give.
In the UK, 17% of parents have opened a Junior ISA for a child, but only 10% have a stocks and shares ISA for themselves 1. Whichever way you decide, with timeframes spanning decades, it’s worth considering investments in stocks and shares instead of just saving cash. Although 56% of parents say they wouldn’t consider investing 1, our article on risk explains why over a century of statistics suggests you should. Remember, investments can go down as well as up and you may get back less than you invested.
The property ladder: how much are we really helping?
Another life milestone, the Bank of Mum and Dad, seems beholden to fund is when our kids start thinking about buying their own place. In fact, it’s the most popular response parents give to the question of ‘how should parents help their children financially in adulthood?’ 1.
However, as noble as the aim may be, it might not always be the wisest course of action. And that’s largely down to timing. If you have debts to sort out, or a pension that looks a bit underweight, diverting your money away from them can be counter-productive. If you clear debts earlier then there’s less time for interest to build up, meaning the debts effectively cost you less.
And if you top up your pension earlier you give the money more time to potentially grow. So by diverting this money to your children instead, you’re not just making it easier for them, you’re making it more difficult for yourself. Wouldn’t it be better to settle your own affairs first so you’re in a better position to help later?
There's also the question around whether helping out does actually make it easier for the kids. If your 22-year-old becomes a responsible homeowner, what if their job takes them to the other side of the country, or abroad? Or what if they feel they need to grow up too quickly because you’re trying to help. Never straightforward is it, trying to be helpful!
Which side are you on?
Help them get an early head start and trust things will work out? Or help yourself now so you’re more able to help them later? I personally save small amounts into Junior ISAs for the children which helps me explain investing to them. However, my priority is to make sure that my own finances are as robust as possible - if I have stable foundations I’m in a much better place to support them down the track.
In our new podcast series, author Holly Mackay talks to Vernon Kay about how much we should help our kids – and how much we should let them find their own path.