As a parent, you’ll surely want the best for your child, and planning for their financial future is a key part of that. Whether you’re thinking ahead to education, a first home or simply a financial safety net, people often ask the question: is it better to save or invest?
Here’s our guide to help you understand both options and make a more informed decision.
Understand the difference between saving and investing
Saving typically involves putting money into a secure, low-risk account such as a savings pot or cash ISA. While this ensures your money is safe and accessible, the returns are relatively low and may barely outpace inflation.
Investing means holding your money in assets like stocks, bonds or funds with the potential for higher returns. This can involve active investing like stock trading or more passive forms in managed funds.
It’s crucial to understand that any investment carries risks – values can grow significantly, but you could also lose money depending on the markets.
Consider your goals and timeline
The decision between saving and investing often hinges on these two factors. If you’re preparing for a milestone in the next five to ten years, such as nursery or school fees, a savings account may be more suitable. The relatively short-term nature of your goal means you’ll want to avoid market volatility.
For goals 10 or more years away, whether that’s funding a university degree or contributing to a house deposit, investing is often more effective. Over longer periods, there’s a greater chance of your values recovering from market dips and still delivering good returns.
Factor in inflation
One of the drawbacks of saving is that inflation can effectively eat away at your money. If interest rates are lower than the inflation rate – as has been the case at many points over recent years – your savings can lose value in real terms. Investments, while riskier, have historically outpaced inflation over the long term.
Look at tax-efficient options
For both saving and investing, tax efficiency is key. Junior Cash ISAs are a popular choice in the UK. You can save or invest up to £9,000 a year tax-free in these savings accounts, with the funds locked away until your child turns 18.
If you’re considering investing, Junior Stocks and Shares ISAs are also an option. Or you can explore other diversified investment funds. These spread risk across different assets and markets, making them a relatively safe choice for long-term goals.
Balance is key
There’s no reason you can’t save and invest for your baby’s future. A combination of both allows you to strike a balance between short-term security and long-term growth.
By saving a portion for immediate needs and investing the rest for the future, you can provide a stable financial foundation for your child.