Invest On Behalf Of Your Kids Now

| October 17, 2018

As parents, we want to be able to provide for our kids. Part of providing is to make smart financial decisions that can help them in the future.

One way to do this is to take their money out of a savings account that’s earning a measly 1% of interest and instead investing it into a well-diversified index fund or ETF.

If you’re investing on behalf of your child, the appropriate account is called a Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) types of custodial accounts set up by parents to hold assets of minors. These can easily be set up with most online brokers.

But aren’t we taking on some risk when we invest our children’s money? Is it really a good idea? Well, let’s see.

Long-Term Return – Savings Account Versus Index Fund

Let’s say you start contributing to your child’s saving’s account at the age of five. You accumulate all that birthday money and other times family and friends gifted money to your little one. Let’s assume it comes out to $5,000.

What does $5,000 in a bank account earning 1% a year VS earning an average of 11% per year in the stock market look like? Take a look for yourself:

Age  Amount 1% Per Year Amount 11% Per Year
5  $  5,000.00  $               50.00  $         5,000.00  $           550.00
6  $  5,050.00  $               50.50  $         5,550.00  $           610.50
7  $  5,100.50  $               51.01  $         6,160.50  $           677.66
8  $  5,151.51  $               51.52  $         6,838.16  $           752.20
9  $  5,203.02  $               52.03  $         7,590.35  $           834.94
10  $  5,255.05  $               52.55  $         8,425.29  $           926.78
11  $  5,307.60  $               53.08  $         9,352.07  $       1,028.73
12  $  5,360.68  $               53.61  $       10,380.80  $       1,141.89
13  $  5,414.28  $               54.14  $       11,522.69  $       1,267.50
14  $  5,468.43  $               54.68  $       12,790.18  $       1,406.92
15  $  5,523.11  $               55.23  $       14,197.10  $       1,561.68
16  $  5,578.34  $               55.78  $       15,758.79  $       1,733.47
17  $  5,634.13  $               56.34  $       17,492.25  $       1,924.15
18  $  5,690.47  $               56.90  $       19,416.40  $       2,135.80
19  $  5,747.37  $               57.47  $       21,552.20  $       2,370.74
20  $  5,804.84  $               58.05  $       23,922.95  $       2,631.52
21  $  5,862.89  $               58.63  $       26,554.47  $       2,920.99

Simple Summary: now at their 21st birthday, they can either cash out two ways, one they have earned less than a $1,000 in interest for 16 years or not even one-fifth of the initial investment.

Or they can cash out with over $26,000 or over 5 times the initial investment; a simple decision, right?

You can add money into their account whenever they accumulate a few hundred bucks.

Even with the trading costs, your kids are better off with their funds invested rather than saved. 

Your Kids Will Be Excited To Learn About Compound Interest

Recently my son asked if we could take out all the money he has from the bank so he can put it in his pocket.

I gave his question some thought simply because I thought it was rude to outright say no.

I didn’t go into the details of compound interest. Instead, I just explained that his money can work with other money to make more money for him. They work together in a magical way. And years later, the money can double, triple or grow even larger. He just gave me a big smile and said: “ok, just leave it there then.”

And actually, explaining this concept to him allowed me to take the leap and withdraw his funds from the measly 1% money market account and open up a custodial investment account. Of course he still has a bit in the savings account for big expenses (e.g., he wants a Play Station 4 for his birthday next year, but we shall see).  

Tax-Advantage For Kids

It seems like whenever we are doing something smart and sensible with our personal finances, taxes propel us and entice us to move forward.

For example, generally over $1,000 in investment income from these minor custodial accounts is tax-free.

Even in their teen years and throughout college, there is a serious lack of financial education in the schooling system. It’s the primary responsibility of parents to teach their kids and help them make strong financial decisions that will yield favorable future results.

The biggest advantage our kids have is time. The second biggest advantage they have is to leverage from informed parents like many of us to guide them to make wise financial decisions to help secure their future.

 I’d like to point out that I am not a professional investment advisor. I strongly advise you to consult with an investment professional before making investment decisions for yourself or your family.

Note: This article originally appeared at Simple Money Man.

 

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Category: Personal Finance

About the Author ()

Hi there! A bit about me; well, I’m in my 30’s and have a steady job in Accounting & Auditing. I’ve been in the Finance & Accounting profession for almost 15 years and have held positions with a CPA firm performing audits of Federal agency programs, a Finance Services Fortune 500 company based in Baltimore, MD, a Federal agency in Washington DC, and currently am working for the State of Maryland. I have a CPA license and a CIA certification that I earned many years ago (full disclosure: may not remember some of the stuff I learned….c’mon it was years ago and like a gazillion topics). What you will get out of this blog: You’ll (hopefully want to) read about simple concepts, simple stories simple language and simple examples all related to money and personal finance cause I’m a simple man. You may also notice a touch of humor in my writing too (hopefully that doesn’t get annoying cause it’s just how I roll). What you may not get: sophisticated writing, complete sentences, corecet spelling (I do know how to spell correct though), and a bunch of stats, figures, and references to things (sometimes you may get a bit of that stuff).

Comments (1)

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  1. Robert Michael Nugent says:

    I have set up an online investment account for my grandchildren and contribute a little each month in place of small gifts every time I see them. Their father helps them invest in shares of stock. They are seeing their money grow and learn what to look for when investing. They are excited to know they are part of a business.