Inflation is a sneaky thief. It can quietly steal the value of your money, without you even realising it. That’s why it’s important to protect your savings from inflation, especially if you’re saving for your child’s future. The Children’s ISA is launching a new range of funds which are designed to shield investments from inflation over a rolling five-year period. These funds offer a great way to shield your child’s savings and also help them build a solid financial foundation for their future. In this piece, we want to explain how both inflation and compound interest affect savings, especially in the context of a long-term vehicle like a Junior ISA.

Firstly let’s deal with inflation, what it is and how it impacts investments. Inflation is the rate at which prices for goods and services rise. It’s measured as an annual percentage and in the UK, at the time of writing, stands at around 10%. Inflation eats into the purchasing power of your money, so if inflation is high, then the things you buy with your money will also cost more. This means that, over time, your money is worth less than it would have been if inflation was lower. The Bank of England’s target rate for inflation is 2% so it’s currently not a great time for conventional savers. 

Secondly, let’s consider compound interest. Compound interest is like the reverse of inflation. When you make an investment, it accrues interest. Compounding means that the interest gained on the investment is reinvested along with the original sum. This has a positive impact on long-term savings as it effectively amplifies your returns.

The power of compounding is one of the key reasons why a long-term investment like a Junior Investment ISA can be such a good way to save for your child’s future. When you invest in a Junior ISA, your money has the potential to grow over the years and has the potential to shield you from inflation. Compounding interest enhances your investment and inflation erodes savings. 

Of course, like any long-term investment, the value of the fund can go up as well as down but based on historical performance a Junior ISA from, the Children’s ISA can perform at up to 5% per annum (see our calculator here for a guide). The Children’s ISA also has a range of funds for you to choose from so you can chime your investments in line with your values. You can also choose what element of risk you are prepared to take too; there are three risk options defensive, balanced and adventurous.

Whatever the inflationary situation is an Investment Junior ISA from, the Children’s ISA is a great way to give your child a head start in life by saving for their future. With compounding interest and a plan to out-run inflation over the long-term, it’s an investment that could really pay off in the future and give your child the headstart in life they deserve.