Can someone explain - not financially savvy!

[Bimbomboosh]

Wondering if someone can help explain something for me:

I have just opened a savings account for my baby at 2.5% interest for a year and would like to save the maximum of £100 per month.

Husband thinks I should pay £100 a month off our mortgage instead. Our interest rate is 1.89% until end of 2023 and we have £135000 left.

I can't afford to do both as I'm only part time at the moment.

Which option will save more money in the end and why? I feel a bit stupid for not understanding or being able to work it out easily.

The savings account will earn more/save more in one year. I assume the rate drops after 12 months?

If you keep overpaying the mortgage regularly it will save more in the long term.

One is short term, one is longer term. One will benefit your child more directly, one will benefit you and your husband.

So the question is really, why are you saving? For your child, or to overpay the mortgage?

Is your husband also saving £100 a month?

How about you both put £50 per month in your baby’s savings account and £50 per month overpay the mortgage?

Well both are good uses of the money but they are quite different length goals.

Your child you only have maximum of 18yrs from birth to save for them going to university or first job/place.

Your mortgage you can be paying off until you retire…which is what? Thirty years or so away?

If you prioritise the mortgage, £100/mo extra won’t reduce your term by much and you delay saving for your child who is a shorter term financial goal which would impact the total you could save to a greater degree.

Personally, I’d do the child savings and once back to work FT start overpaying then mortgage on top of continuing the child savings.

A low interest savings account for a baby is completely bonkers. The time horizon on it is decades, so much more sensible to invest in a savings plan composed of low-fee broad-based index funds such as the MSCI World.

Paying off the mortgage instead would depend on your position once the current rate expires, with interest likely to go up.

Sorry not relevant but - Why are you saving for your child's future from your own personal income if you're married ?

It seems counter productive to save money for someone else's mortgage when you haven't paid off your own.

I would save into a Sipp instead of a savings account they would get and potentially waste at 18 years old. Compound interest and market increase is likely to be more than 2.5% over their lifetime to retirement, the earlier you start the better.

AJ Bell have easy to follow instructions on how to do so.

I would probably pay £50 to the child and £50 on the mortgage.

If you put that amount in the child's bank account at the interest rate you will have £1216.37 at the end of the year. So you will have made £16 interest. You can work it out here:
moneyfacts.co.uk/savings-accounts/monthly-savings-calculator/

If you pay it off your mortgage you will be paying around £22 less in interest a year for every single year AFTER that first year.

So in the long term I would go with paying off the mortgage despite the lower rate - especially as once the term for each ends the bank account rate is likely to go down and the mortgage rate may go up.

Why are you solely responsible for this though? If your dh contributed too could you do both?

Thanks for your replies, will look into the options you have suggested!

Sorry I should've said my DH does save and he is going to put his contribution towards paying off our mortgage (27 years left). We've been living abroad and only just moved back so this is a new plan. He can probably pay an extra £300-500 a month. We do generally keep our bank accounts separate, he pays mortgage and bills and most of the food and has savings for if anything needs repairing etc. I've only just started working but I pay for things for me and baby (clothes, toys etc). He has supported me financially during COVID and subsequent pregnancies (first one was a still birth)

I've generally been quite terrible with money in the past and worked in low paying jobs but I paid off all my credit card debt just before COVID luckily (about 6k) and now only have mortgage debt.

I don't have any savings, but maybe I should work on that first? I'd like to now do what I can towards building some financial security for us and my son, both in being able to afford nice things for him as he's growing up and towards university fees (if he goes) and buying his own house etc. I'm just a bit clueless as to which is the best option to maximize the money and appreciate the advice!

Although I say he can put 300-500 a month but that really depends on what happens with energy bills etc so maybe less

I’d build a pot of savings first, so you’re covered for any emergencies. Then overpay the mortgage.

I’d do a better paying investment for the child as your dh will be overpaying the mortgage.
Check Martin Lewis money saving expert for child investment options.

I would not save for my child in his own name as it automatically goes to him when he is 18. You don't know if your child is going to be a party loving, round -the -world kind of person or a Saturday job and saving for uni/training kind of person. Growing up knowing that money is coming to you is not always very helpful to their young minds.

True. We invested for ours in our own names and didn’t let them know about it till they were 18. They don’t get access to it until we decide. Which will be for a house deposit.

Although saying that, we are now putting maximum money from that savings each month into a Lisa that can only be accessed for a house or pension to get the government boost of 25%. But that has been after they were 18, using the money we saved for them over the years.

You need to decide on a family plan for savings and investments. It really doesn’t make any sense for you to save separately for your child - treat it as a joint aim, surely? You’re married, what’s yours is his and what‘s his is yours.

It sounds like just different priorities- your DH thinks prioritise the mortgage, you want to make sure you save for DS.

First things first, though - do you and DH have pensions and are you paying enough in?

You need to check that you can overpay your mortgage without a penalty.

It makes no sense to do things separately when you’re trying to jointly pay off a mortgage/save for the future. Like another poster said, agreeing joint goals etc would be sensible.

persoanlly I wouldn’t save for a child unless you had an emergency pot. If you do want to save for your child’s long term future you need to be looking at investing. With current levels of inflation, cash may well lose money over an 18 year period.

How is your pension? Think about that first

Pension .... yours!

I do not save for my child at all.
If and when I want to give my child money, I shall do it

Was going to say exactly this.

Yes and you need to make sure you have emergency fund and are saving towards a pension first. Why are your and your husbands finances separate? Ideally you should be looking at this all collectively. Especially when thinking about pension provision.

I would not save in your child’s name unless you were maxed out on yearly ISA allowance invested into a stocks and shares ISA. The returns are not taxed The allowance is £20k a year.