The key to long-term investing is to start early and contribute consistently.
Unfortunately, by the time most of us truly understand this advice, we’re already well into adulthood, having missed out on a decade or two in which we could have been putting money away. Luckily, parents can give their kids a head start by investing on their behalf.
By opening a savings or investment account for your child early on, you can help them grow a nest-egg that can later be used for important milestones such as paying for college tuition, or a down payment on a first home.
When your child is old enough to take an interest in personal finance, you can use those accounts as teaching tools to help them understand investing. Doing so can encourage them to contribute on their own once they’re old enough to earn money, and can help foster healthy financial habits.
What kinds of investment accounts can I open for my kids?
There are a number of different ways to start investing on your children’s behalf. You can choose which type of account may be best for you and your family, depending on your saving and investing goals:
- Tax-advantaged education accounts: Both Coverdell education savings accounts (ESAs) and 529 plans allow you to invest money to be used exclusively for tuition and other education-related expenses in the future. Tax advantages and contribution limits vary. But for parents concerned about paying for college, these plans can offer a way to stay focused on saving for education.
- Custodial Individual Retirement Account: If your child has earned income, you can help them invest it in a custodial IRA. You may open either a traditional or Roth IRA. As the custodian, you manage the assets for your child until they reach age 18, or 21 in some states.
- Custodial brokerage account1: To give your kids the experience of investing themselves and learning about the market, you can open up a custodial brokerage account. These accounts are made possible through the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), and are often known by those names. The availability of either account will depend on the state in which you reside. Through a custodial brokerage account, you can include your child in decisions about basic investing. While they can weigh in with their thoughts, you ultimately have control of the account until they come of age.
Why it’s important to invest for your children’s future
Giving your kids a leg up toward financial stability can go a long way toward helping them achieve their goals, whether that means attending a top university or traveling the world.
Starting to invest early allows you and your child to take advantage of compound interest— the returns earned on your principal, plus your past returns, which can help build savings faster. The longer your child is able to invest, the greater their exposure to compounding will be, which may make it more likely for them to reach their financial goals.
How to explain investing basics to your kids
The conversation you have about investing with your kids will depend on their age, maturity level, and interest in personal finance. For very young children, consider starting investing on their behalf now. As they get older, you can use the accounts you’ve opened as a way to broach the topic of investing.
You can begin with general concepts, such as how a stock works. You can explain that stocks are really a way of owning a very small piece of a company. When you buy a stock, you receive a certificate (either digital or on paper) that shows how many shares of that company you own. When a company performs well, it’s worth more; so the stock you own is worth more. If your stock gains value, you can sell your stock and make a profit. It’s important to point out that stocks can also go down in value as companies struggle or business slows down. If you sell that stock when the value decreases, you’ll lose money.
From here you can explain more complicated topics, such as risk and reward. You hope that stocks will go up and you can sell at a profit, but that is not always the case. You can explain the idea of diversifying—not putting all your eggs in one basket—to help mitigate risk. You can begin to explain the different types of investments that could make up a financial portfolio, such as bonds and mutual funds.
Central to any discussion of finance with kids should be the way that investing fits into a larger program of healthy personal finance and long-term financial stability. Check out the Stash Way to learn more.
How to get your children interested in their financial future
Most young children will have a hard time internalizing the importance of saving for retirement when they’ve never worked a job or paid their own rent. But kids can understand that saving money could help them reach specific goals.
- Investing for shorter-term goals: Encouraging your kids to save for things that are important to them can help them experience the satisfaction of setting a financial goal and reaching it. For example, even if they’re still a few years away from getting their license, your middle-schooler may be ready to start saving up for their first car. Saving and investing over a few years can help them understand the balance of risk and reward, as well as market fluctuations.
- Choose familiar single stocks: Explaining to your kids that they’re able to own a small piece of a company they’re familiar with, such as Coca-Cola or Nintendo is sometimes the quickest way to get them interested in investing.. From there, you can explain that by owning a small bit of that company, they’ll get to share in the profits it earns, if and when it earns profits, by way of dividends. While the stock prices of many major companies would normally put them out of reach for young investors, Stash allows investors to purchase fractional shares of thousands of top stocks.
Before you open an investment account for your child, consider your family’s goals. These will help dictate what type of account you may want to open. Are you trying to save for college expenses in a 529 plan, or do you want to teach your child about investing for retirement in a custodial account? You may even want to open multiple accounts.
How to open a custodial account with Stash
When you subscribe to Stash+ ($9/month) you can create two custodial accounts and there is no minimum initial investment2. You and your kids will have access to Stash’s educational tools to help you make informed decisions about their financial journey.