Rob Gardner, one of the UK’s leading financial experts and a man on a mission to help young people have a financially secure future, has today revealed how parents can help their child build a million pound nest egg – by saving just £5.50 a day from the day they’re born until the age of 10.
Not many people have a spare £5.50 a day, especially new parents – but the point that Rob is making is that whatever you can spare – you should invest. The earlier you manage to save, however small amount you have, then the interest on that money will be working for you, for free.
In his TEDx talk, ‘Teaching your kids the secrets to money and how to use it’ which has been released today, the passionate financial education campaigner and father of two highlights the importance of educating children about money from an early age, revealing some simple but powerful steps to ‘make a millionaire’:
- Make a start: Parents should open a pension for their child on the day they are born.
- Persist: Contribute £5.50 a day into the pension pot every day from birth until they are 10 years old. Because of tax breaks, this is essentially the same as contributing £6.875 per day.
- Stop: When they turn 10 years old, stop contributing. By this point, the pot will have grown by almost £50 a week, or £2,500 a year, to a total of £25,000. With a bit of investment performance in those first 10 years, you could have grown it to between £35,000 – £40,000.
- Wait: Because of the miracle of compound interest, if left alone this pot will grow (roughly doubling every decade) to over £1m by the time the account holder turns 65.
Even a saving of £2.50 per day, put away daily over the same amount of time with no other contribution after the child turns 10, could grow into a half a million pound pension pot 55 years later – a helpful sum for retirement, with just a small daily savings habit.
In his talk, Gardner identifies the global problems associated with the growing savings gap and financial problems people have in the UK and around the world. A third of people in the UK have problem debts and more than 16 million have less than £100 in savings. Increased life expectancy and the growing pensions crisis mean that individuals are now in charge of their money for the present and the future. There is a £6 trillion savings gap set to rise to over £25 trillion by 2050 – this means there’s a shortage in the amount being saved and what is required to give people a healthy income in retirement.
Rob Gardner is also the co-founder of RedSTART a financial education charity aiming to educate one million young people to budget, save, invest and give back said: “People are always shocked to hear my millionaire savings hack and discover that they can grow such an amount for retirement. This is because many don’t understand, or take advantage of, compound interest. Without compound interest, saving £1m by putting £5.50 ‘under the mattress’ every day would take almost 500 years. Albert Einstein called compound interest the eighth wonder of the world and said; ‘Those who understand it, earn it, those who don’t, pay it.’ The secret is to start saving into a pension as early as possible, even with relatively small amounts.”
Compound returns are where saved money is invested over time to earn even more money. It is the practice of saving into an investment account, e.g. an ISA or a pension, and reinvesting any returns earned back again so that next year money is earned on both the original amount saved and the interest earned. This then happens again the following year, and the year after that, with the amount increasing each time. A rule of thumb is that a 7% return for 10 years doubles the original money. If it is then left for a further 10 years at 7%, it doubles again. Investing in stock markets over the short term can be risky but for the long term, it can be a great way to grow your savings.
Gardner added: “Our children are heading towards a bleak financial future if we don’t do something to solve the problem soon. The solution is simple enough, but tragically too few people understand crucial money concepts through lack of engaging financial education in schools. We need to put financial education on the primary school curriculum, because children learn their money-saving habits by the age of just seven, and in the meantime empower more parents to help their children have a financially secure future by starting a pension as soon as possible and teaching their children about money from an early age.”
Gardner is a campaigner for financial education and co-founder and CEO of Redington, the fourth largest pensions consultancy firm in the UK with £400bn in assets under consulting. In 2012 he founded RedSTART a financial literacy charity which aims to teach one million children about important money concepts through fun and engaging games. He is also a children’s author – Save Your Acorns is a financial education book for four to six-year-olds, and sits on the retirement council for the World Economic Forum.
Smallprint from the legal eagles:
(1) As with all investments capital is at risk and the value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.
(2) Money Advice Trust: http://www.bbc.co.uk/news/business-37213026
(3) Money Advice Service: http://www.bbc.co.uk/news/business-37504449
(4) World Economic Forum: http://www.thisismoney.co.uk/money/pensions/article-4544628/Don-t-expect-retire-turn-70.html
(5) As with all investments capital is at risk and the value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.