You want your kids to be financially savvy, but right now, that’s limited to short-term savings in their piggy bank. While teaching them to save up for small purchases — i.e., toys — is great, it might be time to take this lesson to the next level.
Since most young kids only get money from doing chores or as gifts from loved ones, you probably don’t put much stock in their earning power. However, if you teach them to invest, one dollar saved will equate to much more than one dollar earned.
For example, if grandma and grandpa give your 5-year-old $20 for their birthday, they could buy a LEGO Friends Doggy Day Care Building Kit from Target for $19.99. However, if they invest that $20 and continue to invest the same amount annually until they turn 18, they’ll have an ending balance of $3,374 — assuming an APY of 1.10%, compounded daily. This includes an impressive $234.29 in interest earnings.
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To put this in perspective, the average cost of books and supplies for in-state undergraduate students at a four-year public college is approximately $1,298 per year, according to College Board. This means teaching your 5-year-old to save $20 from each birthday until they’re 18 could pay for 2 1/2 years of books and supplies in college.
“Kids may not have much to invest to make a dent in their education bill on their own, but taking their first steps into the world of personal finance and investments can be life changing,” said Ben Arbov, founder and CEO of Greatest Gift, a financial gifting platform for children’s long-term savings.
You might think your kids don’t need personal finance lessons yet, but he said that isn’t the case.
“The world of personal finance is ever changing and evolving,” Arbov said. “Learning financial literacy from a young age can prepare kids to handle money and other personal finance topics like budgeting, investing, building an emergency fund and more.”
He said teaching kids to invest at a young age puts them at a huge advantage. “If parents start investing for their kids early, they can have a potential of 18 years of growth ahead of them, with plenty of time to bounce back from any market dips,” he said.
More than just a fun idea, teaching your kids to invest from a young age can allow them to help pay for their college education — without incurring a mountain of student loan debt. If you’re like many parents, you might not have any money saved for your children’s future.
More than half — 53% — of parents haven’t opened a savings account or college fund for their kids, according to a 2020 CNBC + Acorns Invest in You survey. If you’re not financially able to put money aside for your kids right now, teaching them to invest in their own future is likely even more important.
There are plenty of early investing options available for kids, including the ones below.
A tax-advantaged savings plan used to save for future educational expenses, 529 plans — i.e., qualified tuition plans — are sponsored by states, state agencies and educational institutions. Offered as either prepaid tuition plans or education savings plans, all 50 states and the District of Columbia sponsor at least one type, creating plenty of options for your child.
Each plan comes with its own set of fees and investment options, so it’s important to do your research before opening an account. Depending on your state and the 529 plan you select for your child, you might also be able to incur special tax benefits.
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Opened by an adult for the benefit of a minor, a custodial account is a great way to introduce your kids to investing. Established under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act — the biggest difference between the two is the UTMA covers a wider variety of assets — they can be opened as savings or investment accounts.
When your child reaches a certain age — typically between 18 and 25 years old — they’re able to become the account owner. Several well-known financial institutions offer custodial accounts including Charles Schwab, Vanguard and Ally Bank.
It might seem a bit early to start saving for your child’s retirement, but doing so gives them more time to secure a fortune for their golden years. This type of account requires your child to have earned income, so it’s likely best for teenagers with part-time jobs.
As the parent, you’ll manage the account, while teaching your child about saving and investing. Just as with adults, you’ll be able to choose between a traditional IRA — taxes are paid when money is withdrawn during retirement — and a Roth IRA — taxes are paid when money is put into the account.
Several high-profile financial institutions offer custodial IRAs, including E-Trade, Fidelity and TD Ameritrade.
As a parent, you always want to do what’s best for your child. Teaching them how to invest money from a young age is a gift that will benefit them for the rest of their lives, so don’t underestimate the importance of this lesson.
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Last updated: Aug. 9, 2021
This article originally appeared on GOBankingRates.com: How Much Kids Could Save by Investing Their Piggy Banks