Step 68: Set aside Money for your Children

Step 68 of the 100 steps mission to financial independence: Set aside Money for your Children
Step 68: Set aside Money for your Children

Children cost money of course, even just their day-to-day expenses seem endless: clothes, food, extra activities and birthday parties to name just a few. But I take it for granted that if you have children, grandchildren or nieces / nephews (even if they are “adopted” and your friends’ children), that these expenses are covered in your budget, either in your regular categories, or under ‘presents’ if they aren’t your own children. If you haven’t yet got children, but are planning to have children, I again assume that by now you are financially savvy enough to have set up a savings account in order to pay for the initial “start up costs” for children: baby room decoration, push chair, car seats, clothes and all other assecories you’ll need.

But what about “later”? This might sound like a long time away still, but those children will at some point reach their 18th birthday and will go and try their luck in the real world, whether that is at college, travelling or trying a “real” job, there will come a time when they no longer depend on you (at least not officially – they might still come back home from time to time to ask for some extra money).

Wouldn’t it be nice to be able to give them something more than just a $50 bill when they leave the house, to get them set up? Or what about giving them something when they get married, buy their first house or have their first child.. Whatever it is that you decide, think about what you can do now to help them later. And remember that if you start on time you have the advantage to look ahead and use that best friend of ours: compounding interest to create a small fortune for your (grand)child(ren).

What and how to save

Let’s just calculate through some different scenarios to give you an idea on how to get started. For all of these we assume that you start contributing to these saving plans from the moment the baby is born (or let’s be realistic and say you do it as soon as your (grand)child is a month old).

  • Scenario 1: Open a savings account and set aside $10 a month. Assume an average return of 5% (which unfortunatley is not likely at the moment though!), an inflation rate of 2% and that you keep contributing $10 a month until you give the child the full amount. Your (grand)child would then receive the following amount: (numbers in 3rd and 4th column rounded to $50).

Years

Total paid in Nominal value at end

Adjusted for inflation

18

$2160

$3550

$2450

21

$2520 $4500

$2900

25 $3000 $6000

$3600

  • Not at all bad if you could give your (grand) child some $3550 when they turn 18 or even $6000 when they are 25.
  • Scenario 2: What about instead of opening a savings account (which is unlikely to give you anything close to 5% for a while), you put that money in an investment accout, assuming a 7% return and 2% inflation rate? That works out as follows:

    Years

    Total paid Nominal value Adjusted for inflation

    18

    $2160 $4350

    $3050

    21

    $2520 $5750

    $3750

    25 $3000 $8100

    $4900

  • As you can see, by just putting away $10 a month, even if you held it only til they were 18, you’d be able to give them more than $4300 or the equivalent of $3000 in today’s money.
  • Scenario 3: Of course, you might be able to set aside more than $10 a month. Let’s assume you’re lucky enough to live in a country that has a child benefit scheme in which you get some financial support from the government to help with the expenses for raising children. Imagine you were able to set all that money aside and invest it for your child? Child benefit varies greatly per country but let’s take the average of about $75 per month. Let’s assume we’ve still got an average of 7% return and 2% inflation rate. This is how much you’d have if you keep investing that child support:

Years

Total paid Nominal value Adjusted for inflation

18

$16,200 $32,500

$22,750

21 $18,900 $43,200

$28,250

25 $22,500 $60,900

$36,750

  • By their 18th birthday you’d be able to give your child $32,500 (with a current value of $22,000)! That’s a small fortune to me and it for sure would be to most 18 year olds!
  • That said, child support is generally likely to adjust for inflation, meaning that you get $75 this year, but $76 next year and $77.50 the year after. As long as you keep adjusting your investments along with this, remember that you would then end up close to the nominal value anyway. In that case your child would receive around $32.500 on their 18th birthday.

Of course the above are just some examples of have careful financial planning might give your child a nice head start when they turn 18 or 21 or whatever age you decide. Maybe you can’t survive without the extra child benefit that you are receiviving and therefore can’t invest all of that money. But what about half of it? Or even just $25 a month? $10? Go back to the budgetting steps to read more about how to budget and to build in priorities to decide whether you really can’t or whether you decide to prioritize other goals for your money. Even just the $10 will still give your child a nice pot of money to start their adult life that not everybody gets.

Step 68 – Set aside Money for Children – in detail:

  • Let’s start with how many children, grandchildren, nieces / nephews or other children in your life you (might) have and who you’d like to help financially when they come of age.
  • Investigate and decide how much you can invest either monthly or yearly. Remember that if you have several children (or might have several children) or grandchildren, you probably want to set it up equally, so that you don’t invest $100 per month for child one and only $20 for child two. Plan ahead and try and keep it equal!
  • Open an investing account for each child but carefully check how to do the legal side: make sure you can open it in their name (in some cases only parents can do this). If you are a grandparent and you can’t open it in your grandchild’s name, consider opening it in your name, but stipulate the child as the beneficiary and make sure to include conditions in your will that the money is to go to the child when they turn 18 and not to your heirs.
  • Set up automatic payments into this investing account.
  • Remember that the earlier your start, the more time the interest can compound, but even if your (grand)child is a little or a lot older, that doesn’t mean you shouldn’t still open it.
  • Decide when you want to give the money or the original investing account to your child. Instead of giving them the money, consider that your child could just continue to grow the money. Tell you child beforehand so they can start planning on what to do with the money, as otherwise they might be tempted to take it all out and spend it in just one crazy weekend.
  • Remember to open a new account for any additional children

Saving / investing and seeing your money grow can be really rewarding, but there’s an extra sense of satisfaction you can get from setting money aside for somebody else, and seeing their fortune grow even before they are aware of it.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

Step 53: To invest or not to invest

Step 53 of the 100 Steps mission to financial independence: To invest or not to invest?
Step 53 of the 100 Steps mission: To invest or not to invest?

The big question is of course whether you should or shouldn’t start investing. Ask anybody and you are likely to get very different answers, some saying they can recommend putting in some money monthly, others saying only the really wealthy or dumb invest in the market, whilst still others see it as their main way to (early) retirement.

The truth is, whether or not to invest depends entirely on you, your personal (and financial) situation, and the reasons you might want to invest in the first place. In this step I’ll try to give you some pointers to think about to help you determine whether or not you should invest, but the ultimate decision is yours and you have to feel comfortable and happy with that decision.

My boyfriend at the time (he’s my husband now), suggested we’d start investing in 2009 when the market was at a low. Now I wish we had, as we would have been able to buy lots of really cheap shares, but at the time I didn’t know anything about money and didn’t feel comfortable putting money into something that I didn’t understand. Of course I regret not having bought those cheap shares now, but I don’t regret not putting in money without knowing what I was doing and whether I really wanted to invest. Continue reading

Step 45: Calculate your Desired Pension

Step 45: Calculate your desired pension
Step 45: Calculate your desired pension

Although it is nearly impossible to predict how your pension will develop over time and how much pension schemes will change, especially if you are still many years, if not decades, away from your retirement, calculating your pension regularly and setting pension goals is a key habit to develop and establish if you don’t want to be taken by surprise when you finally get to retirement age and start needing to rely on your pension.

It’s easy to think that our pensions will work their way out for us and that we will be able to retire comfortably after 40 or 45 or even 50 years of working. Yet with fewer and fewer young people carrying the burden of paying for an ever-increasing aging population, not just in numbers but also in years living after retirement as saw in step 42, we don’t know exactly how the pensions will develop. Already many countries are increasing retirement age and this might happen again in a decade a two.  Continue reading

Step 44: Personal pensions

Step 44 of the 100 steps to financial independence: Personal Pensions
Step 44: Personal Pensions

If you aren’t enrolled in a workplace pension and don’t have the option to join one, it is worth considering setting up your own personal pension. And even if you have an occupational pension, you might still want to look into personal pensions either as an alternative, or in addition to your workplace pension. Of course, you don’t have to if your workplace pension offers you exactly what you need and how much you need anyway., but as with anything it is worth considering the different options, to know for sure you have chosen the option(s) that are most relevant to you.

A personal pension works in very much the same way as a workplace pension, with the exception that your employer usually won’t be required to make a contribution. Another difference is that you need to make more decisions. Not only do you have to choose a pension provider (whereas in the case of occupational pensions your employer would have already done this for you), you often also need to choose from different packages, conditions and investment options.  Continue reading

Step 43: Workplace Pensions

Step 43 of the 100 steps mission to financial independence: Workplace pensions
Step 43: Workplace pensions

As we saw before, a workplace pension is often offered by your employer or work sector and contributions are usually made monthly directly from your paycheck. Although many of the characteristics discussed in step 42 on state pensions are also applicable to workplace pensions, the latter often have many additional advantages or characteristics, including some of the following:

Automatic

It is often (though not always!) automatic, meaning in many workplace pensions employees are automatically enrolled. If you don’t take action to opt-out you are systematically making monthly payments into your pension scheme.

Monthly contribution

You can determine your monthly contribution. There is usually both a minimum and maximum contribution you are allowed to make, and although many people might just pay the bare minimum, if you budget well and set aside enough money, you can obviously pay in more. The more you contribute (i.e. save) now, the more you’ll again have by the time you retire, not just from your monthly paymentsbut also from the compounded interest.  Continue reading

Step 42: State Pensions

Step 42 of the 100 steps mission to financial independence: State Pensions
Step 42 of the 100 steps mission: State Pensions

In the previous step we looked at the different types of pensions that exist. In this step we look at state pensions in detail, although many of the characteristics of state pensions also apply to other types of pensions. Pensions vary greatly from one country to the next, if they even exist at all, as not all countries offer state pensions, so make sure to do your homework well and read up on the details of the state pension for your country.

If you are entitled to a state pension this is normally regardless of the height of your salary and of any workplace or private pensions you might or might not have. Bear in mind that most state pensions tend to be far from generous and designed mainly to just provide for your basic needs.  Continue reading

Step 41: An Introduction to Pensions

Step 41 of the 100 steps mission to financial independence: An introduction to pensions
Step 41: An introduction to pensions

Pension… a word dreaded by many, not just because they might not like the idea of being old, or – on the contrary – are worried it’ll be way too long before they can finally retire. Many simply don’t have a clue what their pension might look like and fear that they might never be able to retire properly, due to a (nearly) empty pension pot or the absence of a decent pension plan altogether.

Or maybe you just hate the idea of talking about pensions as it sounds like the most BORING topic in the world to you.

Be that as it is, ignoring your pension is not going to do you any good and considering the many changes that pensions are going through at the moment in many countries, it is wise to learn more about them and especially to understand your own pension projection better and to put together your own pension plan. So you are going to take the bull by the horns here and set up or review your current pension scheme. It might be tough, unpleasant or tedious at first, but once the bulk of the work has been done, you can sit back with a comfortable feeling, knowing you might still be a long way away from where you want to be, or from your retirement in general, but that you’ve put in a plan to get you back on track or closer to your end goal. Continue reading