Why the earlier you start investing, the better

June 2, 2021

Youssef Darwich

We all have that one friend who claims to know when the stock market will crash and when it will rise. Maybe they've got lucky on a few trades, maybe they work in an industry which they feel makes them an expert. Whatever their reasoning, chances are they don't really know and just like everyone else, they're guessing. So with that in mind, how early should you start investing for your children?

The best time to open a Junior ISA for your child is the day they're born, the second best time is today.

If, like us, you're only human and can't time the market (i.e. predict when it will rise and fall) then the best thing to do is invest as early as possible (this assumes that over the long term the investment rises). Why? Because that gives you the maximum amount of time to benefit from "compound returns" and the investment returns can mount up year-on-year. Of course, as with all investing, there is risk that the value of your portfolio can go down as well as up.

What are the benefits to opening a Junior ISA early - the visual answer.

As we've already hinted, the main benefit is that the earlier you start, the longer the period of time available to you to benefit from compound returns (assuming the value of your investments rises).

Here's a short video explaining how powerful that can be in practice.

What are the benefits to opening a Junior ISA early - the detailed answer.

If you really want to understand this let's first start of by explaining what simple returns are compound returns are.

What is a simple return?

Simple return is a fixed % paid on the original amount of money you invest. Let's say for example you invested £100 and were promised a simple interest of 6% per year.

If the investment lasted 5 years then each year you would make £6 on your £100 investment and so after 5 years you would have £130 (your £100 investment plus 5 x £6 payments). In the world of investments, this is how bonds normally work. They pay you a fixed percentage of the amount you invest every year.

What is a compounding return?

Compound returns get a little more complicated but are a lot more valuable. The main difference with simple returns is that the returns you make also take into account the returns you've made in other years. You're basically making returns on the previous returns (hence compounding).

Taking our example from earlier let's see what happens if that 6% compounded instead of being just simple returns.

By the end of the 5 years you now have £134 instead of the £130 you had in the simple returns example. Now I know this may not seem like much but this hypothetical example is in essence what happens if you start investing for your child at the age of 13 (i.e. they have 5 years before they reach 18 and get access to the money).

Compound returns when investing for children

The really interesting thing with compounding returns is that the longer you invest for, the more powerful it is (once again assuming your investments make a positive return which obviously isn't guaranteed).

Let's project our example from earlier further forward and look at what happens to that £100 over an 18 year time frame.

In this example, after 18 years the value of that £100 would now be £285! Essentially you would have made just over £150 additional profit by starting to invest the day your child is born rather than when they were 13 years old.

How does this look with monthly contributions?

Nationally 33% of parents regularly save for their children. At Hapi this number is a lot higher and closer to 80%. Our video earlier compared two parents that invest monthly for their children. One started when their child was first born and invested £100 per month (or £1,200 a year), the other when their child was 8 years old and invested £180 per month (or £2,160 a year). Below is the maths that supports it.

As you can see over the 18 years, both parents invested the same amount for their child (£21,600) but the parents who started investing when their child was first born had made over £9,000 extra for their child's future. That is the equivalent of nearly one extra year uni fees!!

How to start investing for your child

If you've got this far then, firstly, well done and thank you, and secondly, you've now learnt one very important thing.

Unless you're incredibly talented and know exactly when to buy and sell investments, your best bet is to just increase the amount of time you're invested in the market (i.e. start investing for your children as soon as they're born). By doing this you should hopefully reach your goals faster or reduce the amount of money you need to invest to reach your goals.

If this has got you thinking about your children's financial future (and if you're comfortable with the risk of investing and that the value of your investments can go down as well as up) then sign up and get started with Hapi today.

Disclaimer:

This post quotes a hypothetical 6% annual rate of return. When investing, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment. This post should not be read as personal financial advice and individual investors should make their own decisions or seek independent advice.

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