Last week it was reported that inflation for August 2021 was 3.2%. To put this into context, the Bank of England target inflation is 2% and the last time we were at these levels was in 2012!
So how does 3.2% inflation affect your children's savings or cash Junior ISA? And what can you do about it?
Let us walk you through it.
What is inflation?
Inflation is a concept where the value of your money reduces over time caused by an increase in prices. In our example one of the best examples of this is a '99 flake'. Back in the 90s buying this ice cream would cost you 99p. Today if you try to buy one for your kid (or yourself if you're feeling extravagant), you're probably looking at spending at least £2.99.
The 3.2% inflation figure reported in August was for an index called CPI (consumer price index). This is a 'basket of goods' that measures the prices of thousands of everyday items. This 'basket' gets updated as our spending habits vary during time. E.g. This year the ONS (Office for National Statistics) added hand sanitiser to the basket.
Why is inflation rising?
Before you get yourself worked up, the ONS have suggested it will only be temporary for a couple of reasons:
1. The Eat Out to Help Out Scheme.
Think back to August 2020. Do you remember the feeling of reconnecting with friends and dine out?
And let's not forget the 50% off all those lunches and dinners!
2. Transport costs have increased.
Including petrol and used car prices, while adding further pressure on inflation.
Given all those factors, the 3.2% rise in inflation was to be expected.
What does higher inflation mean for me?
This should raise concerns when looking at your finances. But even more if you have set aside money for your children. Whether this is the new normal or only a temporary exception.
So, how can you ensure it plays to your advantage?
Today the top-rate Junior Cash ISA pays around 2.5% interest.
*(Rate provided from Loughborough Building Society).
Let's take our £100 example from earlier and say that one year ago, you saved £100 for your child. That amount is now worth £102.50.
BUT, as we explained earlier on, you would actually need £103.20 to buy the same things you could last year. You've effectively lost money (in real terms)!
Let's now take another example. You have just become a parent today. (Congratulations!)
So you decide to put £1,000 into Loughborough Building Society Junior Cash ISA for your newborn. You have decided to let that money sit there and earn 2.50% every year till they turn 18.
At the age of 18, your child's balance of that account would be roughly £1,560. On the surface that's pretty great. You've taken no risk and made £560 for your child. However, if the inflation rate during those 18 years averaged 3.2%, that £1,560 will only be worth £885 in today's money (E.g. the "99p Flake" is now "£2.99 Flake"). The £1,000 you set aside for your child has actually lost value!
Remember this is the 'best' Junior Cash ISA around. But it still results in an unprofitable venture. Imagine what could happen with other Junior Cash ISAs providers! E.g. Those who were offering you a lower interest. Some tend to pay only around 1% for newborn's accounts.
I don't want my child's savings to lose value, what should I do?
This really comes down to what kind of risk you want to take with your money. In general, the more risk you're willing to take the more likely you are to beat inflation over a long period of time. A smart move would be to invest your money towards assets which are more likely to grow in value in the long term. E.g. stocks, bonds, real estate, etc. These investments obviously have their risks - their value changes every day and it can go up as well as down.
If the following apply to you:
- Your child is still young
- You can handle the increased risk to invest for your children
Then, a Junior Stocks & Shares ISA can often beat the risk of having your money lose value over time. (E.g. a savings account or a cash ISA.)
If you belong to the 70% of parents who has actually opted for a Junior Cash ISA, then you should remember two key points:
- You can have one of each. This might give you more confidence and flexibility in balancing your risk. E.g. Deposit the amount you're most comfortable with in the Junior Stocks & Shares ISA.
- You can transfer a Junior Cash ISA to a Junior Stocks & Shares ISA (and vice versa) at any point. In most cases, it's free to do and it's also a pretty smooth process. The provider (i.e. app or bank) that you are joining will finalise it within a couple of weeks.
My child is 15 and will need the money soon for university. Shall I still move the cash Junior ISA to a Stocks & Shares Junior ISA?
Probably not. As we have explained, investments tend to outperform savings (i.e. grow faster) over a longer amount of time. That does not always apply in the short term. So the general rule tends to be that if you need the money in less than 5 years you should stick to less risky products. E.g. Cash JISA and savings accounts.
Learn more about saving vs investing for your child.
Parenting is not an easy task, but we can support each other in becoming better parents.
We have created this blog for any parent who is looking to further their financial knowledge.
Make the most educated choice and secure a better future for your child today.
Disclaimer:
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 article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice. Past performance isn’t an indicator of future performance.
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