Putting money away for a rainy day is something that most of us aim to do, even if it’s just a few dollars. This might be a cash savings account, a margin account, a 401k or some form of individual retirement account (IRA), depending on your goals and when you want to access the money. You may even choose to diversify your portfolio with real estate or precious metals. But have you ever thought about whether you should set up investments on behalf of your children?
In this post, we explore why it may be beneficial to get ahead with saving money for your children.
Prepare for their future
In the US, parents have a few options when it comes to setting up accounts for their children, all of which are designed to give your little ones a secure future. A Uniform Gift to Minors (UGMA) or a Uniform Transfer to Minors Act (UTMA) custodial savings account allows you to gift money to your children, but they can’t access the funds until they hit the age of majority in your state. This can be helpful if you don’t want savings for your child to sit in your personal account, or if you don’t want to go through the hassle of transferring a lump sum to them once they come of age. Unlike a 529 plan, this money doesn’t have to be used for college, giving your child greater freedom. However, it doesn’t come with as many tax benefits.
Alternatively, parents can open a 529 education savings plan, or a Coverdell education savings account. Both of these options allow you to save money for your children’s college education, and may be tax-free (up to a certain threshold, and dependent on your state). However, the money must be used for education or related expenses such as books, which can be limiting – especially if you want to start saving long before you know if your child will want a college education.
Increase your returns
Whilst it can seem a bit pointless to save money for your toddler, compound interest will mean you thank yourself for looking ahead. This principle means that as well as earning interest on the money you have saved in the account, you also gain interest on the interest – maximizing the amount you get from your initial investment.
To give a clear example of compound interest at work: according to experts, if you invested $10,000 at an interest rate of 5%, after 15 years, you’d have $20,789 – $10,789 of which would be from interest alone. Whilst most children’s savings accounts won’t start with $10,000, it’s still an extremely powerful factor to consider.
Teach them about money
If you’ve got pre-teen or teen children, an investment account can be a great chance to show them how money works and increase their financial literacy. Joint savings accounts mean that you can open a savings pot with your child as a partner, allowing them to spend the funds but with you having full transparency and equal rights.
Final Thoughts
This can be a great way to save allowance money and birthday gifts. Mobile banking and online education tools mean you and your child can clearly discuss saving and spending, instilling good financial habits that will last long after they’ve flown the nest.
