Investing

Best Way To Invest For Your Child’s Future – Set Them Up For Success

Your child’s future might still be a long way off, but thinking about and starting to make investments in it might be the best gift you can give them. By investing in your child’s future, you give them a head start in life that they can only thank you for.

Many parents avoid investing because they think they would have to budget large chunks of their resources to invest. In this guide, you will find out how to invest in your child’s future easily and smartly to build them a great financial future.

Let’s get started!

Why Should you Invest in your Child’s Future?

Before you start to think if it’s truly worth investing in your child’s future, consider these key reasons first.

  • Investing for your child allows their interest rates to grow over time, ensuring they earn more returns on investments later in life. Kids take a while to grow, about 18 years to adulthood if you start early. Over the years, the interest rate goes higher, and the earnings on the investment keep building.
  • Setting up a savings account where you keep money aside for them provides a fall-back plan for your children if anything happens to the parents as the years go by. There would be no need to run about looking for resources because you have money stored away for their future.
  • By starting to invest early, you can take the burden of education debts off your shoulders. You will not need to take loans to pay for your child’s higher education; neither will your child. Your investment or even the return on investment can cover their education expenses, including their college fees.
  • Similarly, investing for your child allows them to go to any college of their choice in the future. They will be able to afford the college expenses and go to college in any state or private school they please, opening them up to more opportunities.
  • As a parent, investing in your child from a young age means giving them a head start in life. When you invest money, create a college savings account, buy shares, pump money into mutual funds, bonds, and other investment options, your child doesn’t have to worry about financial challenges in the future. This can give them a boost ahead of their peers to give them a good life.
Investing For Your Child's Future

What is the Best Investment Account for a Child?

There are many types of investment accounts where you can build your child’s future funds. However, to know the best investment account for your children, you need to decide why you are investing. There are different types of investments parents make for their children. These include college tuition, trust funds, children bonds, etc.

Knowing which of these investments you want to make help to make a quicker decision. Here are the best investment accounts for different categories of child investments:

1. Custodial Account

If your child is not yet an adult, this is one of the best investment accounts you can build for your child. You manage and put funds in this account in your kid’s name until he is old enough to take over the management. However, the child remains the account holder. It’s great for general investments, including savings for education, a house, retirement savings, and other savings plans.

Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) are the two governing acts for a Custodial account. As long as a child is a minor, he/she is entitled to tax breaks under the account. Once the child grows to 18, you give up management of the account and give the child access to manage it as they please.

To begin, you can open a brokerage account or investment account at any bank. Another benefit of this type of account is that some of the earnings gained from the investment are tax-free. If the child earns income, some part of the earnings is taxed based on that income. Some other tax rate is calculated, and a tax deduction is made based on the parent’s income.

Children And Investing

2. Custodial IRA

This is one of the best plans for children who already earn an income. If your kids earn an income, you can help them to open a custodial IRA account. One of the most child-friendly IRA investments is the Roth IRA.

Roth IRA gives your kid’s investment these benefits:

a. Your kids can grow the investment in the account free of tax.

b. You can make withdrawals of your contributions in the Roth IRA account anytime.

c. You can use the investment growth or returns for any plans you may have.

Roth IRA teaches kids the value of interest compounding and imbibes in them the ‘saving for growth’ mindset. With a Roth IRA account, your kids’ savings, future tuition plans, and other forms of future interest can be covered.

3. Junior ISAs

This account was launched in 201 as a replacement for Children’s trust funds. It is a simple savings account for children under 18 with great tax advantages for them. For example, it is tax-free as long as the child is under 18. There are two options when it comes to investing with Junior ISA accounts.

Option A: Cash option, where you don’t have to pay tax on any interest you earn

Option B: You buy stocks and shares and invest the money without paying tax on capital growth.  

Although both have certain contribution limits, you can save into either type of Junior ISAs without worries.

Most parents relinquish management of the Junior ISA and give it to their wards to manage as soon as they turn 18; however, the kids will not be able to make withdrawals out of the savings accounts until they are 18. Between the ages 16 and 18, they can be both Junior ISA and Adult ISA holders, which greatly boosts their tax-free savings for the two years.

4. Brokerage Accounts

These types of savings accounts make a great alternative for Roth IRAs. Although it is a taxable account, it allows you to hold investments for your child in various other securities. You can buy a share, mutual funds, bonds, stocks; you name it.

Brokerage accounts also have their tax advantages, making them a good choice to hold your money. Like a Custodial IRA, you can also create an account in your kid’s name and transfer it to them under the previously mentioned acts (UGMA and UTMA) once they turn 18.

What is the Best Investment for a Child’s Education?

Education expenses anywhere in the world can be too expensive if someone doesn’t properly plan it. This could lead to our child taking student loans to cover the bills and incurring huge debt at such a young age.

You can help your kids avoid this easily by creating savings accounts or education investment options to store and build money for them.

Best Way To Invest For Your Child's Future- College Plan

529 College Savings Plan

College is one of the important parts of your kids’ education, and so investing in it is one of the best deductions you can make for them, and it places them at an advantage.

A 529 college savings plan is a flexible way of investing that allows you to contribute money for your ward’s college education like this:

You invest in a general college savings plan which they can use in any school in any state of the 50 states of America. These covers private and public schools, from kindergarten to 12th grade, as well as college.

The wise thing to do as a parent is to begin the investment process when they are still young so that the earnings can increase tremendously as they grow older. The best thing about a 529 savings account is that it has many tax benefits. One of them is that any withdrawals you make related to education expenses are tax-free; if not, the government charges a 10% federal tax penalty.

One other good thing about this is that anyone can contribute to the account, including other family members that are not parents. The children themselves can also contribute to the build their investment. 

With money or financial contributions coming in from different ways, the child can rest assured of future education.

Other Ways to Invest for your Kids

There are other methods of investment that can help your kids build up their money as they grow.

Best Way To Invest For Your Child's Future- Bank Savings Account

1. Bank Savings Account

This is the typical savings account you can open at any bank. Most banks offer this option, so locating a good one isn’t difficult. You can co-own the account to keep an eye on the resources in it. As they grow older, they get a teen checking account which they can manage with a debit card.

2. Children Shares and Bonds

You can buy a share of the National Savings and Investment (NS&I) or Children’s Bonds before turning 16. This gives them up to 5 years of fixed interest rates, and it is tax-free. However, there are penalties for making early withdrawals, and the interests are not so high.

3. Other Retirement Accounts

Many other IRA accounts can give you great retirement investment plans for your children. You can explore the other options to find the best fit for you to gift your kids the best financial future they can ask for.

How to Teach your Child to Invest

The best time to teach your child to invest is from a young age. The Balance suggests starting from the age of 3 is ideal. Below is how you can do so.

Teach Your Child To Invest

1. Teach them the value of savings

You can start with a piggy bank, one of the earliest traditional ways of savings, and teach them to save in it. As they grow older, you can upgrade this to a personal savings account. This will teach them not only to save but to learn to invest. It will also teach them the basics about finances and make them accountable for the money they earn or receive.

2. Give them access to information about investment and savings

A lot of banks, insurance, and brokerage companies have a lot of information about investments and savings that help both your and old better understand the concept. Starting early to give your child this knowledge is an investment in itself.

3. Teach them to use credit cards wisely

Children see credit cards as magic wands that allow them to get whatever they need. Teach them the value of not spending beyond their means, even if they have credit cards that can pay for it. This can help them learn financial savviness even from their youth.

Conclusion: How to Invest for your Child’s Future

With a good investment plan, you can protect your child and their financial future. This article has helped you explore the ideal plans best suited for your child based on the reason for investment. All that’s left is for you to take action and start investing today.

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Kevin

Kevin is an ambitious entrepreneur that is obsessed with all things related to finance. From a young age, Kevin has always been involved with side hustles ranging from online selling to freelance work. Over the years, Kevin graduated from side hustles and started launching multiple online and offline businesses. Kevin is a serial entrepreneur who loves starting new businesses and exploring all things related to business and finance. He is constantly looking for new ways to save money, invest money, and create income streams.

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