Three years ago, I retired from banking. After more than 20 years working in financial services in the City of London, I am now a man of comparative leisure hanging out at my home in Surrey. Although my children are still in their early 20s and still studying, I have been absolved of the need to provide for them. – I don’t have my nose to the grindstone. I don’t have to do the commute. They are able to pay their own way at university and me, I am free to do my own thing.
How did this happen? Call it the power of compounding. I started saving very early on. Because of this, my children are both now living off interest earned on portfolios I set up for them during my finance career. And while most of my former colleagues are still working to provide for their grown-up offspring – who need university fees paid and house deposits – I am comfortable in the knowledge that my own children don’t need to get into debt whilst at university and each have a chunk of money for when they leave.
How much did I save? Not a crippling amount, but enough to mean that I didn’t get the holiday home or the flat in London. Enough to mean that I had to endure the daily commute at 6am.
Saving is clearly a function of disposable income. If you work in finance for as long as I did, your income should be high, making it easier to save large chunks later on. However, my secret was that I saved regularly from the start – every year, for 20 years, I saved at least 6% of my income for my children in the most tax efficient way possible. In the UK, a Junior ISA can be opened from birth as can a Self-Invested Personal Pension (SIPP). Anyone can contribute to your child’s JISA up to £4,260 currently per tax year. I chose low-cost exchange-traded-products to build diversified portfolios.
Even now, despite being semi-retired in a consulting career, I continue to put money aside for my children. My current vehicle of choice is the lifetime ISA, which allows those aged between 18 and 39 to contribute up to £4,000 per year. HMRC (Her Majesty’s Revenue and Customs if you’re in the U.S) will then add a 25% bonus to everything you’ve put in. The LISA can be used as a deposit for first-time property buyers. If not used, it can formed part of your pension pot.
The key to saving for your children – and to escaping a full-time finance role before you’re too old, then is start early and to invest sensibly for the long term. You don’t have to put a huge amount aside, but do need to do it consistently over a long period. Compounding is an incredibly powerful tool when you use it over two decades.
In theory, people in finance know this. In reality though, a lot of people in the industry are quiet about how they invest their money. Many of my former colleagues are currently funding their children’s education from income they’re earning, or from money they had put aside for themselves. My advice is that it’s much easier to ring-fence money for your offspring in tax-efficient accounts from the start.
If you’re a 30-something in finance now, therefore, you should saving for your children as soon as possible if you want to get out while you’re still (fairly) young. Save small and often. My only other piece of advice is to invest in as near an identical manner as possible for each of your offspring. – You don’t want one to be a millionaire and the other a pauper.
Richard Andrew is the pseudonym of a former London portfolio manager now at home in Surrey.
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