We all know about the importance of investing for our futures, but do we all know how crucial it is to start also planning for our kids’ futures? Expenses like college or higher education or even helping with your child’s first home, can be achieved through some basic investment strategies. Better yet, there are ways to get your kids investing at a young age!
Essentially, the earlier you start building your financial portfolio and understanding the importance of financial control, the more financially secure your future and the future of your children can be.
Investing In Your Kids Education is Very Important Said SiLoans expert
In today’s world success is sometimes measured by the level of education you have, rather than actual qualifications or experience. This is why higher education has become an integral part in defining your child’s success for their future. Planning for college comes with big expenses. As tuition rates and fees continue to rise, saving for college has become increasingly more important.
Student debt just in relation to college expenses has accumulated to over $1.5 trillion dollars, and is almost impossible to steer clear of. It’s almost as if student debt is a way of life. This is why it’s so important to start saving and investing what you can into your child’s future college fund.
There are different routes you can take when it comes to savings plans. These will vary depending on your specific situation. The two most common are an Education Savings Account (ESA) and 529 Plans. Regardless of the plan you decide to go with, they both allow your initial investment to grow tax free and will offer tax free benefits when it comes time to withdraw them. The biggest difference between the two is simply how you invest the money.
Education Savings Account (ESA): Deciding to go an ESA route allows you to choose almost any kind of option to put towards your child’s education. This can be via socks, mutual funds, or even bonds. Each year, you are allowed to invest a maximum of $2,000 per child that can be used to cover any fees or expenses having to do with their education.
While the amount you can put into an ESA will differ depending on how much you and your spouse make annually, they do offer users a lot of investment freedoms. You can also utilize your funds to cover the cost of any educational expenses.
Unlike the 529 option that is strictly for college tuition rates, ESA plans can help cover a range of primary, secondary, and postsecondary schooling expenses. This can be expenses in the form of tuition, books and materials, uniforms, transportation, and even boarding expenses for private institutions.
529 Plans: Each state will have their own available 529 plan, as it will directly help to go towards in-state college tuition and even K-12 tuitions. Essentially what a 529 Plan does is lock in the current rate of tuition for colleges within your state, and allow you to start saving for your child’s future education. As tuition rises each year, this will ensure that you have access to the tuition amount for your child at the time you sign up for your 529 plan, and not when they turn 18 and start applying for schools.
529 plans will differ depending on which state you live in, and some will even transfer if your child ends up going to college out of your home state. Make sure you fully understand the limitations of whichever 529 plan you register for, so you can make the best financial decision for your child’s future.
Investing portfolio options are more limited utilizing a 529 plan than an ESA, but they are still viable options. You are also able to reallocate the money within your savings portfolio two different times each year, which allows for some flexibility throughout your child’s life. You are limited to contributing $14,000 a year in any 529 plan, so keep that in mind when making your decisions.
Investing In Other Avenues For Your Kids
While education is a big aspect of your child’s future, there will be other expenses that can benefit from you having the foresight to invest in. As they get older, life will present your kids with multiple opportunities that could have benefited from them starting to invest early on.
Life-changing events like getting married, buying their first car or home, and having children of their own will place big financial strain on them. This is why parents are opting into investing in other avenues to further benefit their child’s future.
Investment account options will typically fall between Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) which we have covered below.
Uniform Transfers to Minors Act (UTMA): Where UGMA tends to be more limiting, UTMA plans allow users to give many different kinds of assets to their children to help them financially in their future. Assets can include patents, royalties, real estate, and even paintings worth additional money. Essentially, anything can be given to your child to help them later on with their finances through UTMA.
It’s important to stay up to date on your UTMA plan, as most accounts will automatically close when your child turns 21. There are circumstances with some states that allow adults to maintain control of the funds and assets until your child turns 25, and some states may not offer UTMA plans whatsoever.
Universal Gifts to Minors Act (UGMA): The other option of UGMA will let you, or anyone, gift stocks, bonds, insurance products, and cash without the extra step of opening a trust on behalf of your child. These items will be held and secured by the parent or another custodian until your child reaches the age of 18 and can utilize those funds to start applying and beginning their college careers.
Regardless of plan you choose, there aren’t typical contribution limits for either. Just keep in mind once you give a gift, you can’t give it back. That is why it’s incredibly important to have a financial plan laid out to cover all aspects of your finances.
Getting Your Kids Excited About Investing
The earlier you can get your children interested and excited about investing, the better chances they will grow up to be financially stable individuals in society in the future. There are numerous apps and kid-friendly companies that offer plans specifically for getting your child started in investing.
Apps like Stash are great because they allow users to invest small amounts of money with little to no monthly fees. Look into Walt Disney, WWE, and Build-a-Bear Workshop companies, among others, that offer special introductory investment opportunities for your child. Breaking down investing to a fun and creative outlet can prove beneficial for them, and utilizing companies that they already know and love can further build that excitement.
The older your children get, the more they will be able to grasp more than the bare basics of investing. At this point you can start building your child’s financial portfolio through many avenues of investing. Look into index funds as another alternative method to get them involved in investing.
Getting Your Kids To Invest In Their Own Future Retirement: We know the importance of investing in our retirement, so why should our kids be any different. It may seem weird to start planning for their retirement days when they are so young, but this can actually be a great step towards financially protecting their future.
When your child starts earning money of their own through part-time jobs or even birthday cash, they can start setting aside some of it for their future. Opening up Custodial IRA or Roth IRA accounts can be another great avenue to explore when planning for your kid’s future.
Depending on how old your kids are, it may be fun to play around with the Investor.gov Compound Interest Calculator to show them just how much their money can grow as they navigate through adulthood and reach retirement age.
Start by putting hypothetical monthly contributions and play around with interest rates of about 7%-8% (the current average rate of return on most 401Ks and IRAs). It may seem kind of cheesy, but seriously, sit down with them, play around with the numbers, and get them excited about investing in their own future!