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5 ways to Invest for Kids

picture of a young child with a smiley face with dollar sign eyes covering her likeness

5 Ways to Invest for Kids

Let's talk ways to invest for kids. As a parent, you are not obligated to invest for kids. BUT, this is an extraordinary gift if you can swing it. Of course, you should provide all of the basic needs for your child(ren), and the majority of us go above and beyond that! You need not be a millionaire or come into a windfall of money to do this. You may be wondering how do I start investing for my child? Let's take a look at some of the best ways to invest for kids. 

1. Put your oxygen mask on first

You can't truly help someone else unless you've addressed your own needs. Your future is just as if not more important than your children's. If you tend to yourself properly, it follows that your child(ren) will likely also be cared for. Your child(ren) can take out student loans to fund an education, but you cannot borrow money for your retirement. Educate yourself. Follow financial content creators, use your local library, sign up for classes and seminars, hire a financial advisor - whatever it takes to become financially literate! Spend less than you earn, eliminate unnecessary expenses, max out retirement account contributions, save and invest, increase income and assets, and decrease debts. Create an estate plan including a living will. Look into life, disability and long term care insurance. Okay, that seems like a lot (phew), but tackle one step at a time!

2. Model financial literacy

It's not uncommon for significant wealth to be eroded through the generations because financial literacy was not passed down along with any assets. Money is obvious, but time and effort is also an investment. Break generational cycles and make building generational wealth a priority. Follow accounts that focus on teaching kids about money in age appropriate ways. Let your child(ren) compare costs and pay at the cash register, get in the habit of saving some of their money, delaying gratification and saving towards a big purchase. Give your child(ren) a seat at the table when you're discussing money matters. If not YOU, then who?!

3. Establish GOOD credit history. 

Experian's five levels of credit scores
If you have good credit and use credit cards appropriately, then you can add your child(ren) as authorized users on your credit card. Using a credit card appropriately means not carrying a balance, and paying the card off in full each month. Check with your credit card lender(s) to see if a minimum age is required and when they report activity to credit bureaus. Check out this Forbes Article for insight into your specific credit card company. 

Use of the credit score influences everything from renting, getting hired, opening your own credit card, financing major purchases and qualifying for lower interest rates. Part of the credit score is length of credit history, so give your child(ren) a boost by letting them "borrow" your good credit. Check out this post for more on how your credit score is determined. You don't have to hand over an actual credit card to an authorized user, but that can be part of the financial education you provide at home. A final word of caution: while building credit is a possibility, so is identity theft and fraudulent activity. 

4. Build an education fund

It's worth repeating - you are not obligated to fund your child(ren)'s education! But this can be an extraordinary gift if you can manage it AFTER you tend to your own current and future financial needs. Open a 529 plan, a tax advantaged education savings account: the earnings grow tax-free, and withdrawals for qualified educational expenses are also free. Check out my post on 529 plans for more information. An Educational Savings Account (ESA) is an alternative for those who qualify, but there are more restrictions on eligibility and contributions - visit savingforcollege.com to compare 529 plans and ESAs. 

5. Build a fund that's NOT for education

There are several possibilities. You may consider a custodial brokerage account - an investment account managed by you on behalf of your child(ren). When your child reaches a specified age in your state (typically 18 or 20), then they gain full control of the account. Check out this U.S. News Money Guide to Custodial Brokerage Accounts article for more information. An alternative could be a high yield savings account. You would be the owner, but could use it for or transfer it to the child at your discretion. Name your child(ren) as the beneficiaries of their respective accounts. Utilizing HYSAs and investment options will put your money to work and will grow from compound interest over time. The sooner you start, the better! Consider potential drawbacks such as taxes and effects on qualifying for financial aid. But don't let that stop you!

Conclusion

No matter how you decide to invest for kids, the fact that you're considering the future at all is wonderful. I love that for you (and them)! When you start early, a little can go a long way with the effects of compound interest over time. When it comes to family finances, take care of yourself first. Be intentional about modeling and teaching financial literacy. Give a boost with establishing credit if possible. Diversify your investment and savings plan by building funds for both educational and non-educational expenses. 

How are you investing for your child(ren)? 

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