- Before you start investing for your kids, teach them some basic money lessons like budgeting and saving.
- By matching your kid’s savings, you can help them learn how investments grow their money over time.
- There are multiple investment avenues for minors, including a 529 Plan (for education expenses) or a custodial brokerage account for stock market investing.
“The best time to start investing was five/ten/twenty years ago. The second-best time to start investing is today.”
It may sound like cliché advice, but it’s remained tried and true over the years. People who start investing in their 40s wish they had started in their 30s. And those who actually did start in their 30s, wish they started in their 20s. The longer timeframe you create to contribute a portion of your income to investments, the more it will be worth when you need it. The power of compound interest will grow your wealth exponentially. So giving your nest egg 40 years to grow instead of 25 can often add hundreds of thousands of extra dollars.
When you start a family, one of your first thoughts is probably “how can I afford this?” You’re not alone. Raising children is an expensive task, no matter how you slice it. So how can you set up your kids for future financial success? Well, investing isn’t just something for full-time workers. You can actually start investing for your children as soon as they’re born.
Why Invest For Your Kids?
You’re probably thinking to yourself, “I’m not even sure I can invest enough money my own retirement, how am I supposed to invest for my kids too? Where’s it all going to come from?”
And honestly? That’s a fair argument.
After all, your kids are (presumably) going to have their entire working lives to save and invest their own money, right? Investing for your kids isn’t only about stashing money aside, though. It’s about giving them a small step up, while also teaching important financial literacy lessons. Even if you’re not investing for your kids retirement, you can be investing for things like their college education.
Maximizing Investment Time Horizons
We’ve echoed this advice over and over again, but the longer you investments can sit, the more they are generally worth. Yes, markets go up and down all the time. They tanked in 2008 and again in 2020 and are suffering right now, in mid-2022. But long-term investments are just that — long term. Most adults start investing in their 20s or 30s, hoping that thirty or forty years of returns will keep them comfortable in retirement.
So what if that same principal was applied to fifty years? Or fifty-five, even?
On average, the stock market posts an annual return of over 10%. That adds up in a big way. Let’s take a look at some numbers. Suppose you contribute $1,000 a year to an EFT, index fund, or mutual fund on behalf of your child. Here’s what it would be worth after a certain number of years (assuming 10% returns, on average):
- After 10 years: $15,937
- After 20 years: $57,275
- After 30 years: $164,494
- After 40 years: $442,592
- After 50 years: $1,163,908
The different between investing for 40 years and 50 years is a whopping $600,000 more. That’s what maximizing your time horizon is all about.
Teaching Financial Literacy At An Early Age
Maybe you can’t afford to invest $1,000 a year for your kids. After all, you need to retire someday too. Maybe you can only afford $500. Or even $100. In some cases, it’s not the overall amount that matters. Getting into the habit of regular investing is an important piece of financial literacy that your child can make a part of their life forever.
You can teach this lesson without an investment account. For example, every time your child gets some money for their birthday or Christmas (or whatever), have a brief talk with them about it. Let’s say they get $50 from a grandparent on their birthday. The average 8-year-old will want to spend it immediately — probably on cheap plastic toys or junk food. We have a better suggestion.
Budgeting For Kids
Take that $50 and split it up into five $10 bills. Now talk to your child about the best way to allocate those bills. You can suggest they spend one $10 on whatever they want, another $10 on something they need, put $10 or $20 away into savings, and even earmark $10 for some sort of charitable donation, if you want.
But if your kids are like most normal kids, they’re probably going to argue with you. Why can’t they spend all $50? After all, it’s technically their money to spend, right? Here’s how to negotiate with them:
Tell them that every dollar they save (or “invest”), you’ll match it to a certain percentage. Open a no-fee savings account and put your kid’s money in there. Then add your own contributions (parents commonly offer to match 100% or 50%). You and your child can check the balance online. Then they will be able to see that the $20 they “invested” has suddenly become $30 or $40.
Kids and Debt
Kids don’t really have a strong understanding of how money works. After all, everything they need (and most of the stuff they want) just shows up, bought and paid for by the adults. When they get a bit older, they may even try to negotiate with you.
“Please can you buy me this [insert item here]??? I’ll pay you back, I promise.”
While your child may diligently pay you back with their birthday/Christmas/part-time job money, it’s a bad habit to encourage. You are essentially acting as their credit card, letting them buy things they can’t afford. Except an a loving parent, you’re probably not charging interest. That 19.99% APR will hit them hard when they stop borrowing from mom and dad, and get a regular credit card instead.
Instead, teach them early to save for the things they want. They will need to forgo some immediate gratification (ie, spending their money on candy, trinkets, or — shudder — microtransactions). However, when they come to you and say they want to buy a new iPad or PS5, you can say “Well, how much money have you saved?”
Best Savings Account For Kids
Okay, so you have a plan. Let your kids spend a little bit of their money on whatever they want, but the rest gets stashed into a back account for when they want something more expensive. Ideally, you match their contributions a bit and create an informal “investment account” for your budding financial guru.
Here are some of the best savings account to start for your child:
PNC “S is for Savings” Account
The PNC ‘S is for Savings’ account is a simple youth savings account. It pays interest on any balance over $1, which will also help you child learn how money can grow over time. There’s no service charge, as long as the account holder is under 18. You can easily check your child’s balance online or with their mobile app.
One really great feature about this account is the interactive learning experience. Your child can login and see three virtual jars — one for saving, one for spending, and one for sharing. They can move their money from jar to jar, practicing for how to allocate it. There’s also an official Sesame Street tie-in, allowing Elmo and his buddies to offer your child some age-appropriate financial lessons.
Capital One Kids Savings Account
Capitol One offers an attractive child savings account. It has no minimum balance, no fees, and pays 0.30% annual percentage yield (SPY) to help your kid’s money grow over time. It also lets parents send allowance or other deposits directly from their own accounts.
With the help of the intuitive Capitol One mobile app, you child can actually multiple Savings Accounts and assign a specific goal to each one. This is a lot like PNC’s jar system, except you can label one account “new bike” and another “new laptop.”
BECU Youth Savers Account
This one a little different, since BECU is a credit union, not a traditional bank. Like the others, it has no minimum balance and no service fees. The biggest attraction, though, is massive interest rates on the first $500 your child saves.
BECU is currently offering 4.07% APY on the first $500 deposited. You’re unlikely to find a better deal than that. Unfortunately, the rate of growth drops dramatically after $500, shrinking to 0.02%. If you think your child is capable of saving much more than $500, you may want to opt for one of the traditional banks. If not, though, this could be the best choice.
Custodial Investment Accounts
We’ll go ahead and state the obvious. Your underage child cannot invest any funds on their own. You have to be at least 18 to open a brokerage account. However, many firms now offer Custodial Accounts. Your minor child is the account holder, but you, as the parent or guardian, have custodial control and managing access. In legal terms, though, the money belongs to your children.
These accounts are known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UMTA). They typically have no deposit limits, but you should consider the tax implications of both before you start.
You can also start a custodial IRA for your underage teenager who earns their own income (think a teenager with a part-time job). These have the extra advantage of allowing your child to use their savings for college or as a down payment on a house. However, a 529 education account is probably a better bet for saving for school.
When your child turns 18, you turn over control of the account to them. If it’s accumulated a significant sum by then, it’s even more important that your now-fully-legal-adult child has a strong (and responsible) financial acumen. Otherwise they will be YOLOing their entire portfolio into the next meme stock or trash cryptocoin that they read about on Reddit. That’s usually bad news.
Investment Strategies For Your Child
Ideally, your child won’t need this money for a long time. Even if they do cash some (or all) of it out for college or to buy a house, there could be close to two decades worth of contributions and gains. If they leave it for retirement, even better. Remember those numbers from before? Forty or fifty years worth of regular contributions and compound interest could have your child sitting at well over a million dollars when retirement age finally hits.
Since it’s such a long time frame, you probably want to focus on long-term growth. Sure, some shorter stock plays can be fixed in too. Mostly, though, you’re best to stick with a mix of stocks, bonds, index funds, mutual funds, and ETFs. You could also consider Real Estate Investment Trusts (REITs). Just don’t put all your eggs in one basket, like pouring all of their retirement money into Bitcoin.
The Bottom Line
Kids are expensive. Like, really damn expensive. Any parent will tell you. It may seem like there’s barely a dollar to spare, between dance lessons, new soccer shows, field trips, and the constant stream of clothes they keep outgrowing. You’re supposed to fund all that, start a college fund, and still have enough money to retire yourself one day? It can feel impossible.
However, the most important step is getting started. With plenty of accounts having no minimum balances and no service fees, you can literally start with $5 or $10 a month. Set up an auto-transfer, if you need to.