investment strategy

Best Way to Invest $1,000 For a Child

March 9, 2022

Investing in the children in your life is important. While investing your time, energy, and love is most integral, investing cash can go a long way toward improving your loved one’s financial future. 

But where do you even start? With so many different investment options, it can feel intimidating. 

If you have $1,000 sitting around (or any amount you can afford to invest), what should you do with it to maximize the benefit of your generosity? 

What is the best way to invest $1,000 for a child? That depends on the goal and the time horizon. 

A newborn child has many years before they will need to access the funds and can therefore handle a somewhat more volatile investment strategy. For a teen who will need funds for college in just a few years, the strategy should be more conservative. 

The comprehensive guide below will discuss everything you need to know about investing for a child. 

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Why Is Investing Early Important? 

Investing early is important because it allows relatively small amounts of money to grow into significant wealth. 

For example, investing $1,000 one time for a newborn baby could result in a $490,370 portfolio by the time that child reaches retirement age. This assumes 10% average returns, which is the average long-term return of the U.S. stock market. 

The earlier you invest, the more time the money has to grow. 

Through the magic of compounding interest, invested money is able to grow faster and faster with time. 

The basic concept is this: When you earn interest, you earn a return on the money you invested. When you earn compound interest, you earn a return on the money you invested and a return on the money that your investment has already earned. 

Compound interest formula
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For example, if you invest $100 and earn 10% per year, you will earn $10 in interest and have $110 after one year. 

In year two, you will earn $11 in interest because you’re now earning 10% on the $110 current balance of your account. 

In year three, you will earn $12.10 in interest (10% of $121) and so on.

This trend only accelerates as time goes on. Compound interest creates a “snowball” effect, with growth accelerating more rapidly as time passes. 

Examples of compounding investment returns 

The examples below assume 10% average returns, which is the long-term average return of the U.S. stock market. 

To conceptualize the compounding returns, let’s look at a few examples of what it would look like to invest on behalf of a newborn child. Want to test out your own numbers? Use an investment calculator

$1,000 invested once (no further investments) and left to grow for 18 years will result in approximately $5,559.

  • If that $5,559 is left invested for another 30 years, with no further investments, the balance could grow to $97,001

As you can see, an upfront gift can make a huge difference in a child’s future financial security. 

Recurring monthly investments can be even more powerful: 

$100 per month invested for 18 years will result in approximately $57,739

  • If that $57,739 is left invested for a further 47 years (until the child is age 65), with no further investments, the balance could grow to $5,092,434

$50 per month invested for 18 years will result in approximately $28,869

  • If that $28,869 is left invested for a further ten years, with no further investments, the balance could grow to $74,878

$20 per month invested for 18 years will result in approximately $11,547

  • If that $11,547 is left invested for a further 47 years, with no further investments, the balance could grow to $1,018,416.

This last example is perhaps the most astounding. If you invest just $20 per month for a newborn baby and continue until the child is 18 years old, that investment account could grow into over $1 million dollars by the time the child reaches retirement age. 

The total amount that you would have contributed in this scenario? Just $4,320. 

Best Way to Invest $1,000 For a Child 

If you are prepared to make a generous financial gift to a child, investing the money will have the greatest impact. But there are two important factors to consider:

Where to invest: What type of account should you use, and where should you open that account? Your goal should be to minimize potential taxes (both for you and the child) and maximize the versatility of your generous gift.

What to invest in: Should you invest in stocks, bonds, ETFs, or something else? Your goal should be to choose an appropriate investment strategy based on the child’s current age and your goals for the money. 

Each of these topics will be covered in greater detail below. 

Where to Invest For a Child 

Children who are not legal adults generally cannot open their own investment accounts. There are ways around this, however. 

Any adult can open a custodial account in a child’s name, and the child will gain control of the account once they are of legal age. 

Then there are specialty accounts, such as the 529 account. These are designed for a specific purpose, like saving for college, and may have tax benefits. 

Here’s what you need to know. 

Custodial account 

A custodial account allows any adult to open an investment account on behalf of a child. 

The “custodian” is the legal adult who opens the account. This adult will have control over the account until the child becomes a legal adult. 

The “beneficiary” of the account is the child. This individual cannot directly control the account, although they technically own the assets inside of it. When the child becomes a legal adult (at age 18 or 21, depending on the state), they gain full control of the account.  

There are a few different types of custodial accounts, but the basic functionality is similar. 

Importantly, custodial accounts do not have a specific purpose for the funds inside them

Once the beneficiary is a legal adult, they can use the funds for any purpose. That could be going to college, traveling the world, starting a business, or just paying for everyday expenses. 

This is different from a 529 account (discussed below), which is set up specifically for college savings. Custodial accounts are far more flexible than a 529. 

529 is specifically for college savings
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Meet EarlyBird

The easiest way to set up a custodial account and start investing for kids is to open an account with EarlyBird. 

EarlyBird custodial account for children

EarlyBird is an investment platform that makes it simple for adults to invest in the children they love. 

Any adult can open an EarlyBird account and assign a beneficiary to the account. Then, anyone can contribute money to the account, allowing adults to collectively invest in the financial futures of children. 

Any funds contributed into an EarlyBird custodial account can be invested in a diversified portfolio of assets. This includes all the best investments for kids, like stock market index funds, international stocks, and bonds. 

EarlyBird is unique in several ways. The two most important factors are:

  • EarlyBird makes it easy for multiple people to gift and invest on behalf of a child — in one custodial account.
  • EarlyBird makes it simple to invest in a diversified portfolio of investments with no investing experience required.

Ready to get started? Download the EarlyBird app today

529 account 

A 529 account is a type of tax-advantaged investment account that is designed to be used as a college fund for kids

529 accounts allow you to save for a child’s future educational expenses. If funds are withdrawn to be used for qualifying educational costs, they will be tax-free. All the investment growth associated with the account will also be tax-free. 

Like a custodial account, a 529 must be opened by a legal adult who acts as the account custodian. The account is set up with a designated beneficiary, such as a young child. 

However, the custodian of the 529 (the person who opened it originally) maintains control of the account forever. The funds do not automatically transfer to the beneficiary when they become a legal adult. 

If funds are used for anything besides education, income tax will be owed — and a 10% tax penalty may apply.

For these reasons, 529 accounts are only recommended when you’re confident that the beneficiary will be going to college. For more flexibility, opt for a custodial account. 

What to Invest In 

The decision of what to invest in for a child depends on two factors:

  • How old the child is. Generally speaking, the longer the child has before they will need the money, the more aggressive you can afford to be with investments.
  • What the goal of the money is, and how much might be needed. 
Stocks, bonds, cash, alternatives
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The most important part is to invest and invest early. Here’s an overview of the different types of assets you could invest in. 

ETFs and index funds

Index funds are a type of investment product that lets you invest in hundreds or thousands of companies all at once. Many are structured as exchange-traded funds (ETFs), while others may be structured as mutual funds. 

Instead of buying individual stocks, you can just buy “the stock market” itself. 

For instance, you could buy a low-cost S&P 500 index fund. The S&P 500 is an index of 500 of the largest publicly traded companies in the U.S. By buying the S&P 500, you’re buying a small slice of Apple, Amazon, Meta, Disney, and hundreds of other large companies. 

The benefits of index funds are diversification and simplicity. You don’t have to worry about picking the right stocks, and your investments are automatically diversified into 500+ companies. 

For best results, look for index funds with low fees. Index fund fees are listed as an “expense ratio” and are usually a percentage of the assets you invest. 

For example, a fund with a 1% expense ratio would charge $10/year on a $1,000 investment, while one with a 0.07% expense ratio would cost just $0.70/year. 

Individual stocks 

You can also invest in individual stocks. This allows you to make a bet that a certain company will do well — and ideally, that it will do better than the overall stock market

It is exceptionally difficult to pick stocks that beat the returns of the overall stock market. 

In fact, around 60% of professional fund managers underperform the S&P 500. That means that most professional investors can’t beat the market. 

In most cases, it’s best to stick to passive investments like index funds. 

Savings bonds

Savings bonds are a more conservative monetary gift. They are safe from the fluctuations and volatility of the stock market, but they generally do not appreciate as much as stocks. 

TreasuryDirect is the place to buy federal government bonds online. Savings bonds can also be purchased from municipalities, utilities, and even private companies. 

Other assets 

There are many other asset classes to consider, including:

Other types of bonds: You can also buy bonds through an investment account using a bond ETF. These funds pay out dividends but historically have returned far less than stocks. 

Real estate: Real estate is a difficult asset class to gift due to its expensive nature. However, real estate investment trusts (REITs) may be an option. These are investment vehicles that trade like stocks and represent companies that own dozens or hundreds of real estate properties. 

Cryptocurrency: Cryptocurrency is a form of digital currency that is based on blockchain technology. It is a volatile asset class, but it has had extremely high returns over the last decade. Learn more about crypto for kids here

EarlyBird investment portfolio

EarlyBird provides a simple way to build a diversified investment portfolio for kids.

Parent carrying child

You don’t need to be a stock market whiz or a financial expert. All you need to do is sign up for an account, select a prebuilt portfolio, and start contributing money. 

EarlyBird has preselected investment portfolios based on the guidance of industry experts. Depending on your goals and risk level, you can select from portfolios including stock index funds, bond index funds, international index funds, and even cryptocurrency. 

Conclusion 

Investing for a child can have a profound impact on their future. Whether you want to support a college fund or just set aside money for the little ones in your life, be sure to invest wisely to optimize the benefit of your gift. 

Looking for the easiest way to invest for a child? Try out EarlyBird. This powerful tool makes it easy for your entire family and friend circle to collectively invest for children.

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