Investing for Kids 101 – Millennial Money

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One of the best things you can do for a child is set them up for financial success.

Financial literacy is a basic life skill that everyone should understand before reaching adulthood. But unfortunately, many kids enter the workforce without a solid plan or financial foundation in place and spend years or even lifetimes trying to catch up.

Since you’re reading this article, you have a unique opportunity to help your child get ahead of the game.

In this post, I’ll explain how you can help build a solid financial future for your kids through saving and investing — and what you can do to get started right now.

Why Invest for Your Kids?

As you may already know, I struggled during my early adult years. Money was very tight, and I had to work nonstop to get ahead. At one point, I had thirteen sources of income.

I can’t help but think: If only I invested at a young age!

Money certainly isn’t everything in life, but it’s pretty important. When you’re financially set, life becomes a lot less stressful and far more rewarding.

As a parent, you can play a big role in helping your kids earn financial independence.

With all this in mind, here are some of the top reasons to help your kids save and invest.

1. Maximize the time horizon

As a general rule, investments tend to do better when they’re held over longer periods of time because a longer time horizon allows an investor to take greater risks. On the other hand, when you have a time horizon of just a few years, you need to be much more conservative.

Most investors typically start putting money in an investment account in their early 20s or 30s, giving them roughly three or four decades to maximize growth.

By having your kids invest while they’re younger, you can increase the time horizon by at least a decade or more — allowing them to maximize compounding gains and potentially shave off years of work as they approach retirement age.

2. Teach kids how money works

Many people don’t even consider the idea of teaching kids about putting money in an investment account instead of spending it on frivolous things.

Of course, as you’re reading these words, it might already seem like a no-brainer to invest in your child’s future. But it’s a whole different ballgame when your 6-year-old is kicking and screaming on the department store floor because they want you to shell out money on a new toy.

By investing with kids and explaining how it works, you can show them the value of a dollar and how it can grow over time. Keep it up, and they’ll learn how to save and invest responsibly.

3. Prevent early debt

Young adults often fall into debt because they lack the means to support themselves. Without cash to buy things, they take out expensive loans, rack up credit card debt, and spend the next few decades trying to pay them off.

You can help your children avoid this trap by encouraging them to let their money grow over time with compound interest. This way, when it comes time for a down payment on a car or their first home, your kids can draw from their own savings.

Start With a Savings Plan

Pro tip: Start small before you dive into the deep end of the investing pool. A basic savings plan makes a lot of sense as a first step.

To illustrate, you might begin by teaching kids basic budgeting principles, starting with something other than money.

For example, you might want to limit your child to one hour of screen time per day. If the child uses a half-hour before lunch, that leaves only a half-hour after dinner.

To stress the importance of savings, you might want to expand this and let the child decide if they’d prefer to carry over unused time to the next day.

Once the child starts to understand how budgeting works, you can introduce the concept of money — explaining what it is, how you earn it, and where to put it so that it can grow.

Best Savings Accounts for Kids

Chances are your child will start to accumulate money from gifts and possibly earn under-the-table income through allowance.

As your kids begin to outgrow their piggy banks, here are a few savings account options to consider.

Capital One Kids Savings Account

A Capital One Kids Savings Account comes with a 0.30% APY, no monthly or maintenance fees, and $0 minimum balance requirements.

BECU Youth Savers Account

BECU is a leading credit union. A BECU Youth Savers Account comes with a 2.02% APY on the first $500 you put in.

PNC ‘S’ is for Savings Account

PNC Bank offers the ‘S’ is for Savings Account, which starts earning interest on balances of at least $1. This account comes with an interactive online banking experience, along with a Sesame Street Learning Center for financial education.

Investing With Custodial Accounts

After your child learns the basics of saving and budgeting, it’s a good time to introduce investing.

You can’t directly invest for your kids using a regular brokerage or retirement savings account. However, you can set up a custodial account.

A custodial account is a type of account that an adult sets up and manages on behalf of a minor. Another word for this type of account is a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account.

Since there’s no limit to how much you can put into a custodial UGMA/UTMA account — and you have the choice of whether to make the account taxable or tax-friendly — this is an avenue definitely worth exploring.

Custodial brokerage account

A custodial brokerage account is a brokerage account for minors. You can use a custodial brokerage account to invest in stocks, bonds, and mutual funds, among other investments. Options tend to vary across different brokers.

A custodial account technically belongs to the minor. When you set up the account, you merely manage it.

You can choose when to transfer ownership of the account to the minor — typically between the ages of 18 and 25.

It’s important to note that a custodial brokerage account factors into financial aid eligibility.

You can also use a custodial brokerage account to transfer wealth to your kids. For 2021, the limit for tax-free gifts with a custodial brokerage account is $15,000.

Top custodial accounts for 2021

Best overall: Ally Invest

Ally Invest provides commission-free trading, cutting-edge research and analysis tools, and up to $3,000 in bonuses when opening an account.

Best for low-cost funds: Vanguard UGMA/UTMA

A Vanguard UGMA/UTMA account provides access to a wide range of low-cost, high-performing index and mutual funds.

Best for passive investing: Acorns Early

Acorns Early lets you set up recurring investments starting at $5 per day, per week, or month.

Custodial retirement account

In addition to setting up a custodial brokerage account, you may also want to look into a custodial individual retirement account (IRA), which is available to minors who earn income.

This account belongs to the minor — just like a custodial brokerage account. But you’ll manage the account until the child becomes an adult.

There are a lot of benefits to opening a custodial IRA.

For starters, money can grow tax-free because it’s funded with after-tax dollars. Plus, the child can use the money to cover qualified higher education expenses, and the funds can also go toward a down payment on a house.

Best custodial retirement accounts for 2021

Schwab

Schwab has a $100 minimum for opening a custodial account. The company doesn’t charge maintenance fees and comes with a user-friendly platform with strong customer support.

Fidelity

Fidelity offers a plan that comes with zero commissions and zero minimums to invest. The company also has a robust website and a strong customer support department.

Forming an Investment Strategy

Again, before you dive in, you’ll want to spend some time forming an investment strategy.

Your child or teen has a long horizon ahead. This gives you a bit of wiggle room to plan for their financial future while teaching some valuable lessons.

As a general rule of thumb, it’s a good idea to start with long-term, low-cost index funds. This provides broad market exposure and sets a nice foundation for growth.

Once you have a foundation in place, you may want to start sprinkling in some individual stocks.

This is an opportunity to expose your child to different types of stocks and explain how the market works. For example, you might want to add a few slow and steady stocks like Home Depot or Costco. Buying shares in these companies will likely lead to steady growth over time and teach the value of conservative investing.

It could also be a good idea to mix in some more volatile, high-growth stocks so your child can get a taste of what volatility feels like. Let them see sudden highs and valleys, so they can understand how the market moves.

Most importantly, you want to demonstrate the value of consistency and long-term investing. Avoid making knee-jerk reactions whenever possible and try to embody the value of thinking ahead and being patient.

At the end of the day, this is one of the best things you can teach a young investor. It worked wonders for Warren Buffett — and it could also work for your child.

Learn More:

Frequently Asked Questions

Should I use a UGMA for college savings?

On one hand, a UGMA can provide strong long-term growth. On the other hand, it’s visible to colleges when applying for financial aid. So if you have a lot of money in a UGMA account by the time a child reaches college, it could impact how much funding they receive from the government.

That shouldn’t deter you from investing in a UGMA. But it’s a good idea to also put money aside in a tax-friendly 529 plan for education-related expenses.

How should I invest my child’s money?

If you start investing when your child is very young, you could have a decade or two of growth before a child reaches adulthood. By steadily contributing to this account over time, you could set the child up for long-term success.

The trick is to focus on diversification for both long-term and short-term growth. For the best results, build a core portfolio full of stocks, bonds, index funds, mutual funds, and exchange-traded funds (ETFs).

You could also expand into other assets — like real estate investment trusts (REITs). This can be a relatively safe and profitable avenue — especially when considering that REITs have to pay 90% of taxable income to investors as dividends.

Can kids invest money in the stock market?

Unfortunately, kids can’t invest money on their own. The minimum age for a brokerage account is 18.

You can help by opening a custodial account at any time and managing funds on behalf of your child. Then, when the child becomes an adult, they can manage their funds on their own.

It’s important to note that a custodial account belongs to a child. As a custodian, you’re merely managing it and acting as a financial advisor. The money is legally theirs — not yours.

The Bottom Line

As a parent, it’s easy to feel like a walking ATM — especially when you’re constantly buying things like diapers, soccer cleats, school supplies, or trips to Disney World.

Since you’re already shelling out money left and right, you’d be all the wiser to put some money aside for growth. By opening a custodial Roth IRA or investment account when your child is young, you’ll make it easier for them to reach their financial goals later in life.

The bottom line is that teaching your child financial planning is one of the best things you can do as a parent. If you’re committed to helping your children succeed, you need to make sure that they know how money works by the time they reach high school or college.

To me, one of the biggest downsides of the current education system is that it doesn’t teach the younger generation enough about finances. It’s up to us to reverse that trend.

Here’s to leading by example and accelerating your kid’s journey to financial freedom.

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