Read more
- 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.
Shutterstock
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.
Shutterstock
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?”
0 Reviews