Did you know that the sooner you learn about money, the sooner you can create more of it? The power of compound interest and the stock market makes this phenomenon possible and raises the importance of investing for kids.
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Why Should Kids Care About Investing?
Investing money allows individuals to follow their dreams without incurring large amounts of debt. The younger your kids are when they start investing, the greater the potential returns could be. Investing in the proper accounts and stocks can make all the difference in your kids’ futures. But what exactly does that look like, and how can a kid make solid investments?
What Is Investing?
Investing refers to using cash to purchase financial assets, such as stocks, bonds, real estate, or mutual funds, to generate income, grow wealth, or achieve other financial objectives. The process requires taking on various levels of risk. Typically, the greater the risk of the investment, the greater the potential returns (or losses) could be.
While many lump investing and saving together, they’re two very different activities. Saving involves putting money into low-risk savings or bank accounts to preserve the original amount and earn a little interest over time. Investing involves taking on the risk of losing money to achieve a higher return on the initial investment.
The power of time with both investing and saving cannot be understated because of compounding interest. Compounding interest is when you earn interest on the original amount you invested and the amount you have already accumulated. In other words, time is your friend in investing, and the sooner you start, the more you will have at the end.
Even though investing can be a complex and risky endeavor, it allows individuals and organizations to grow wealth and achieve long-term financial goals. Conducting thorough research on a company you wish to invest in can help to reduce the risk, along with consulting with a financial advisor or planner. Parents have turned to educational resources such as YouTube videos and finance books to teach themselves and their kids how to invest.
Overall, when learning how to invest, preparation is imperative. Never feel pressured to put your money in the market immediately, as great deals occur all the time. Remember to be responsive, not reactive.
What Types of Investing Are There?
Many types of investments are available for people of all ages and financial backgrounds. For parents looking to secure their kid’s futures, some investment options include opening a savings account, a money market account, or an investment account such as a brokerage account. The major difference between high-yield savings accounts and regular savings accounts is how the accounts accumulate interest. Saving accounts use simple interest, whereas high-yield savings accounts use compound interest.
High-yield savings accounts, money market accounts, and mutual funds can provide higher interest rates for savings and long-term financial goals. These accounts exist for investing in the stock market, individual stocks, or index funds like target-date funds. While these accounts can be viable for achieving personal finance goals, remember that investing in the stock market involves risks.
Numerous investing strategies exist for kids and adults alike. Buy-and-hold involves buying to hold the stock indefinitely or for at least a period of three to five years. The passivity of this strategy makes it appealing. However, one must avoid the very real temptation of selling during a downturn in the market.
Another approach involves buying index funds like the S&P 500. Since these well-diversified stock collections accurately reflect the market, the index strategy is a safe bet with few downsides. But you could miss out on some winning companies. To remedy that weakness, there’s the index-and-a-few strategy, where you have most of your money in an index fund and the rest in a couple of your favorite companies, like Apple or Lowes.
Dividends, or company payouts, can be used to supplement income. For this reason, investors implementing an income strategy buy stocks based on these earnings.
Lastly, there’s dollar-cost averaging or the habit of periodically adding a certain amount of money into the stock market. Any combination of these strategies can be used for stock investing for kids, but the index-and-a-few combined with dollar-cost averaging balances safety with learning opportunities very well.
Many routes exist for families to learn financial literacy and build wealth for the future. Starting with the basics and gradually increasing your financial knowledge and investment skills provides the surest way to achieve long-term financial goals.
How Can You Help Your Kid Reach Their Financial Goals?
Teaching little kids about spending and saving real money can help them develop good money habits and practical money skills. Parents can start with simple lessons like setting savings goals and creating a family budget. For older children and teens, introducing financial topics like credit cards, debt, and delayed gratification can help prepare them for financial challenges in the future. Creating investment accounts for kids also helps decrease financial illiteracy and increase financial security in the future.
The research involved in investing in stocks will not only teach your kid about finance but about macro- and microeconomic principles. After all, financially-smart kids are born when parents invest in their children’s futures. Investing in your kid’s future is not only a monetary responsibility but is about having financial conversations and finding resources to help your kids begin investing for themselves.
What Resources Are Available for Your Kids?
There is a whole host of finance websites and programs that can teach your kids valuable skills. A couple of notable examples include Greenlight and Money Time. Books and videos about investing for kids can also teach them the basics at a young age. Your blossoming readers might be interested in a finance book like Investing for Kids: How to Save, Invest and Grow Money by Dylin Redling and Allison Tom.
Online and literary resources are helpful for getting your kids up to speed on financial jargon. Understanding how to talk finance sets them up to be financially successful on the stock market. Even offering a reward, such as five dollars, for finishing a book provides another great way to encourage reading while fostering financial literacy and competence.
Implementing a hands-on approach by setting up a custodial account is another route to help your kids reach their personal financial goals. Custodial accounts can be set up for minors to manage and invest in stocks or mutual funds with the help of a parent, teacher advisor, or financial planner. For example, Fidelity Youth Account allows kids between 13 and 17 to invest in most US stocks and to purchase fractional shares. These accounts allow parents and kids to learn more about investing together.
What Is the Best Way for a Kid to Invest $1,000?
The best way to invest $1,000 for a kid is to put that money into their future, whether retirement or education. Designing a moderate-risk or balanced portfolio provides one of the best ways to do that. Moderate-risk portfolios maximize profits with risk by utilizing a diversified portfolio of a 50/50 or a 60/40 stock/bond split.
Bonds are essentially stocks issued by the government and carry low to no risk for the investor. Investors further diversify their accounts by dividing companies into eleven sectors: real estate, consumer discretionary, consumer staples, financials, energy, communication and media, healthcare, utilities, information technology, materials, and industrials.
Skilled investors try not to overweigh any sector and instead allocate their money in quantities that will maximize growth. Putting money into a Custodial Roth IRA, a 529 Education Savings Plan, a Coverdell Education Savings Account, or a UGMA/UTMA account provides another great way to invest $1,000 in your kid’s future. With these types of accounts, parents act as custodians investing money on behalf of their kids.
What Is the Best Way to Invest Money for Your Kid?
There are four main account options available for parents wanting to invest for their kids. The first is a Custodial Roth IRA, a retirement account that grows tax-free. To qualify, a child must earn an income from a part-time job. Your child can withdraw money for educational purposes and other significant expenses after the account has been open for five years. However, until your kids reach 59 1/2, they can only withdraw the contributions, not the earnings.
If you want to invest in your child’s future, Forbes Advisor recommends a 529 Education Savings Plan. Under this plan, you can withdraw tax-free if the money goes towards qualified educational expenses. Two types of 529 plans exist. You can pay into prepaid tuition plans, in which you buy college credits for the future at today’s pricing, and education savings accounts, where you build a balance and invest your money in the market. The second option allows your kid to invest in ETFs and mutual funds.
Another educational investment plan involves putting money into a Coverdell Education Savings Account. Like a 529 plan, a Coverdell Education Savings Account allows tax-free withdrawals for educational purposes. The Coverdell accounts have a strict contribution limit of $2,000 that shrinks as your socioeconomic status increases.
Finally, opening a Uniform Gift to Minors Act, also called the Uniform Transfer to Minors Act (UGMA/UTMA account), provides a way to teach your kids how to invest in the stock market as they do on Wall Street. These accounts bring family finances to a whole new level.
Parents act as custodians, meaning they are responsible for opening and maintaining their kids’ accounts until they reach 18 or 25, depending on the state. The other half of this responsibility is to teach your kids financial lessons that result in a positive cash flow for their accounts. Some parents choose to do this by hiring and meeting with financial professionals that can suggest what allocation of stocks, bonds, or mutual funds the portfolio should be for maximum growth.
Remember: Buy Low, Sell High
Investing with your kids can be a great way to teach financial literacy, grow wealth, and secure a successful future. To help children reach their financial goals, parents should do research, set up an investment account, and consult with a professional financial advisor or planner. However, as the old adage goes, if you give someone a fish, you feed them for a day. But if you teach them to fish, you feed them for a lifetime. The same is true with investing. With the right resources and strategies, your kid can have a real head start in life.
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Nothing in the Investing for Kids 101 FamilyApp article constitutes professional and/or financial advice, nor does any information in the Investing for Kids 101 FamilyApp article constitute a comprehensive or complete statement of the matters discussed or the law relating thereto.