Longer term investments and compound interest

Two of my good friends each had a baby yesterday. One couple had a boy and the other a girl.

It’s wonderful when your friends can share such joy and elation with you, especially against the backdrop of what is going on in the world.

Listening to each of my friends tell their stories, I reflected on how well prepared they seemed for welcoming a new life into the world. That is, as prepared as they can be - it will still be a total shock of course! But they will have the cots, the clothes, the pram and many more things they may never even use. ?It was this preparedness that got me thinking. There are hundreds of practicalities we plan for in having a baby, raising them to adulthood and preparing them for their own lives. But if the real aim is to lead a joyous life, can we prepare for that?

Financial planning is a tool – just as much as a good education, or a healthy diet - which helps people lead the very best lives they can. By removing stresses and making life goals achievable, it allows people to enjoy the here and now as well as building for the future.

So as parents, family and friends, what can we do to support a brand-new life on their journey?

Simplicity is key. And saving a little can make such a huge difference. If my friends began saving for their children now, they would have a real kick start in their futures just through the power of preparation.

Here’s an example:

If today the parents (or grandparents) put ￡240 into a pension each month, this would be increased to ￡300 by the government. That stacks up to ￡3,600 saved per year. Carry that on for 10 years and ￡36,000 is saved for the child.

Had that money been invested and earning, say, a modest 5% per year (harnessing the ‘magic’ of compound interest) this would total ￡45,280 after the same 10 years.

If that pension was never added to again after the child’s 10th birthday, but continued to be invested earning 5% per year, that child at the age of 65 would have ￡662,701 - that figure is huge compared to the original savings invested!

This is a small example that shows how preparing for long-term financial security is well within reach for most families. As parents, we will never be able to predict every challenge our children might face, but we can do a lot to put them in the best position possible live the life they want. ?