Investing in your child’s future is an exciting prospect. Not just because you’re investing for a loved one, but because of the numerous investment options at your disposal. The goal of this guide is to highlight investment opportunities with a likelihood of high returns.
Since kids have time on their hands, you can unleash the power of compound interest. For instance, you can turn a daily $5 investment, at an annual rate of 7%, into $800,000 in 50 years.
Alternatively, invest $200 per month at the same annual rate, and see the money grow to $520,000 over 40 years, yet your child’s total contribution would be $96,000 only. With that in mind, let’s take a look at the top 8 ways to invest for your kid’s future.
It’s never too early to drum into your child the importance of saving, and the first step is to open a savings account for them. That should help them save a bit of their money from allowances or part-time jobs.
While all savings accounts earn interest, some will even provide debit cards. This empowers you to monitor and set guidelines for your child’s spending. Some of the best debit cards for kids to consider include:
● Acorns Early
● Stash Invest
● M1 Finance
These accounts provide lessons on borrowing, spending and even help in setting up automatic investments.
If you need a risk-free way of investing, then this is the way to go. Savings funds are a tax-free financial savings product issued by the government, although you will pay tax when redeeming the bond.
Plot for the long haul, as the government will double your initial investment after 20 years. In addition, the rates have dropped drastically, reducing its short-term investment viability.
These fall under the Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA), allowing child investments in special accounts.
You will control it until they are adults, and each parent can deposit up to $15,000 per annum. The great thing is other people can contribute to this account, subject to their own $15,000 annual limit. Contributions can go past the limit, but it will trigger the gift tax.
Stock market investment
It might seem intimidating, but if you learn the stock exchange dynamics and think long term, investing in the stock market might end up being one of the wisest financial decisions you ever make.
If anything, most of the child investment plans and custodial accounts you will come across in this guide allow stocks trading, whether they are individual stocks, mutual funds, or index funds.
If you want to trade directly in the stock market, open a custodial brokerage account in your child’s name.
5. 529 plans and Coverdell Education Savings Account (ESA) According to the Institute of Education Science, student loans stood at a startling $24,480 on average based on 2015/2016 figures. It’s no wonder that you would wish to sort out your child’s education before it gets to such unmanageable levels.
One of the best ways to go about it is through a 529 plan, which are tax-advantaged investment plans that come in two flavors:
· College Savings Plan: contributions pooled in investment vehicles such as mutual funds, and get amplified as the child nears college age.
· Prepaid Tuition Plans: you open a prepaid plan and lock the price, so you don’t have to pay any increases until it matures. These may not be available in every state. If your child attends a school out of state, you can apply for a refund or transfer the value.
For 529 plans, education-related withdrawals are tax-free, you can apply at any time, and the plans apply to K-12, public, private, and religious schools. Both parents can contribute up to $150,000 per child.
An ESA is a tax-deferred education trust that’s more limited than 529 plans since the total contribution per year is $2,000 across the board, and you must establish it before the child reaches 18 years of age.
With mutual funds, the management will take your child’s contribution and pool it with others, creating an extensive portfolio of investments, such as bonds and stocks.
Fundamentally, your child will not own the securities, just shares of the mutual fund invested in.
Passive account managers will recreate the performance of a stable benchmark index, such as the Dow Jones and S&P 500. Active mutual fund management involves actively buying and selling investments by trying to outperform these benchmarks, which is riskier.
Your child can invest in mutual funds through 529 plans, ESAs, and IRAs, which can work a treat if they take advantage of compounding returns.
Exchange-Traded Funds (ETFs)
These are similar to mutual funds in that they hold a diversified portfolio of bonds, stocks, and other investments. The main difference is that ETFs trade openly in the stock market, affording them better liquidity than mutual funds.
Another great thing about ETFs is you can opt for either active or passive investing style. Active ETFs charge much higher management commissions because a manager has to spend time tracking and trading in and out of securities to achieve your investment goals.
Passive ETFs are a form of index fund that track a broader market or a group of related assets. That means you don’t have to spend time on risky trading, such as picking stocks for short-term investing.
Custodial Traditional and Roth IRAs
Like the conventional IRA, this allows your child to start saving for their retirement. Since they are not adults, they can only open a custodial IRA.
A custodial IRA is a tax-advantaged savings account that allows investments such as bonds, stocks, and ETFs. The only difference between the different types of IRAs is when you pay taxes.
The child can withdraw the cash once they get to age 59½, but it will incur a 10% penalty if they decide to withdraw before the retirement age.
If you’re looking for ways to leave your child a nice financial safety net for future use, saving funds in a piggy bank won’t cut it. Look to long-term investments that are relatively safe and guarantee a massive increase in the initial investment due to the compounding effect.
Check out zero-risk investments such as savings funds and high yield savings accounts. Alternatively, consider other low/high-risk options such as IRAs, ETFs, 529 plans, mutual funds, and stock market investments.
Jessi is a working mom to two living in Central Florida. She has a Master’s Degree in Legal Studies but decided to make her career in social media marketing and content writing. When she isn’t cooking up something new in the kitchen, she is traveling with her family and looking for new adventures!