Invest for Kids: How to Get Started

December 23, 2020
investment strategy

As the saying goes: Time is money. Time is the most precious resource we have available. And it makes a huge difference in financial investments.

The later someone starts investing in life, the more they’ll have to sock away each month to live comfortably well into their golden years.

So, doesn’t it make sense to start investing as early as possible?

When it comes to your loved ones, you can give them an incredible head start by investing in them long before they’re of age to invest for themselves.

When you invest for kids, you’re setting them up for the financial freedom required to live life to its fullest. Plus, if you do it right, you can help grow their financial literacy along the way.

Read on for a breakdown of all the amazing benefits you’re gifting to your loved one when you invest in them, plus an easy-to-follow breakdown of how to get started.

Why Create an Investment Plan for Children?

Creating an investment plan for a young child might seem premature, but there’s actually no better time to get started.

Thanks to compound interest, money set aside for a child at a young age will be far more impactful than waiting to start saving until they need the money.

Here are 4 huge benefits of creating an investment plan right now:

To promote financial literacy

Today’s financial literacy rate is troubling, to say the least.

A recent study found that only about one-third of Americans can answer four out of five basic financial literacy questions. The numbers are even less promising when you look at those in the 18–34 age group.

Financial literacy is a topic not often taught in schools, meaning it has to happen at home or on a one-on-one level with a knowledgeable adult. There’s no reason to wait until a child reaches adulthood and moves out on their own to start teaching them about money.

Doing so places them at a disadvantage early on, one that could be hard to recover from.

Starting the investing conversation early can make sure a child is prepared when it’s time to leave home. Lessons in financial literacy can help children immensely by giving them a strong knowledgebase that will help them live comfortably and safely as adults.

To prepare for the future

There’s no doubt that the children of today will face significant expenses throughout their lives, including funding their education, buying a home, possibly raising children, and hopefully retiring comfortably.

Because of compound interest, the amount of time their money is in the market makes a huge difference in whether they’ll have enough later on.

If you were to start saving for college when a child was 17, it would seem insurmountable (and likely would be impossible for most families). But by preparing early, you can have 18 years to help a child save for their goals.

But that’s just one example. Maybe the child in your life doesn’t want to go to college. Maybe they want to travel the world or start a business right out of high school. By providing them with financial investment gifts, starting at a young age, you’ll be able to make those dreams a reality too.

To involve friends and family

It’s not just parents that want to help a child grow and succeed in life. Friends, family, godparents, and others may also want the opportunity to contribute to a child’s life and happiness.

Between birthdays, holidays, graduations, and more, there’s no shortage of events for a child to receive gifts.

By starting the conversation about investing early and sharing that plan with other family and friends, you give everyone who loves a child a chance at contributing to their financial future in a meaningful way.

This is an ideal opportunity to teach a child they have a whole community supporting them and rooting for them to succeed in life.

To reduce financial stress

A recent study found that 77% of people feel anxious about their financial situation and more than half feel that finances control their lives.

The same study found that when people are stressed about money, they’re less likely to save, budget, and plan ahead financially. Which can lead to even more financial stress. It’s a vicious cycle, and not one you want your loved one to get stuck in.

Investing for a child you love at a young age doesn’t guarantee they won’t experience financial stress later.

But, between increased financial literacy and the presence of money in their investment account when they reach adulthood, you’re greatly improving their chances at a stress-free life (at least when it comes to money).

What Type of Account Is Best to Invest for Kids?

Brokerage firms generally require someone to be at least 18 years of age to open a brokerage account.

But there are plenty of ways to start investing for kids, whether you’re saving for college, retirement, or just trying to fund their hopes and dreams.

There are a variety of accounts to choose from, but we’re going to focus our attention on UGMA (Uniform Gifts to Minors Act) accounts.

Why an UGMA account?

An UGMA account is a custodial account that allows a parent, guardian, or other loved one to open an account, contribute funds, and invest for a minor.

Money in a UGMA can be used for investing in individual stocks, bonds, mutual funds, index funds, exchange-traded funds, and more. The adult who opens the account can make contributions and direct investment decisions until the minor turns 18 or 21 (depending on the state).

While the adult who opens the account manages it, the money in the account legally belongs to the child whose name is on it.

The account owner can’t remove or redirect the funds. Then, when the child reaches adulthood, the account and the money in it becomes theirs.

So why a UGMA account?

  • It's simple to set up and contribute, but offers investing opportunities, unlike a savings account.
  • It’s flexible (the child can use the funds for anything they wish, once they’re of age).
  • The portfolio can be customized based on investment goals and priorities.
  • The portfolio can be varied over time as risk sensitivities and preferences change.
  • A parent or guardian can actively manage it until the child comes of age.
  • You can bring the child along for the ride (teach them what a mutual fund is, explain investment portfolios, help them understand risk and track growth, and more).

And with a UGMA account like EarlyBird, you can contribute to your child’s financial future while giving friends and family the opportunity to do the same.

The parent controlling the account can easily select one of five fixed ETF investment portfolios. Then they can customize it further by selecting value-based funds representing causes they and the child care about, such as saving the environment or driving diversity.

Plus, family members who contribute can leave heartfelt memories for the child to view and cherish as they age.

UGMA account vs. 529 plan

A 529 plan is a tax-advantaged college savings account that allows parents and loved ones to start saving for a child’s education.

When you contribute to a 529 plan, your dollars get invested and grow tax-free. When the time comes, you can use the money to pay for qualified education expenses without paying taxes on distributions.

The money from 529 plans can be used for a wide array of education expenses, including tuition for college or K-12 education, books and school supplies, fees, room and board, and more.

So why open a UGMA account over a 529 plan? Let’s talk about some of the advantages of UGMA accounts over 529 plans:

  • Flexibility: You have to spend the money in a 529 account on education-related expenses. Otherwise, you risk paying some large fees and taxes. And while this type of tunnel vision might work well for some kids, it’s not for everyone. What if your child grows up and decides to start a business instead of going to college? Unfortunately, it’ll be a lot more challenging to use the money for that purpose.
  • Investment options: If you want more control over the investments in your investment account, a UGMA may be a better choice. With a UGMA, the account owner has much of the same control they would in a traditional investment account. But with a 529 plan, you can only choose from a handful of investment portfolio options.
  • Account limits: There’s a maximum amount of money that can go into a 529 account for a single beneficiary. While the amounts differ by state, they range from $235,000 to $529,000. And while that’s likely more than enough for most families, you may prefer a plan where you aren’t limited to gifting a certain amount of money.
  • Account ownership: When you’re gifting money to a child in your life, you might want some assurance that the money will go to the intended recipient and that they’ll be able to spend it how they choose. With a 529 plan, account owners can redirect money from one beneficiary to another. But with a UGMA account, the money legally belongs to the child whose name is on the account.

UGMA account vs. IRA

An individual retirement account (IRA) is a tax-advantaged retirement savings vehicle.

Anyone with earned income can contribute to an IRA, and the account owner can invest the contributions how they like. For those under the age of 18, a custodial IRA allows parents to control it until a child reaches adulthood.

IRAs are a great tool to use to save for retirement, but they aren’t a substitute for a UGMA account. Here’s why:

  • Flexibility: With a UGMA, a child can use the money in their account for anything once they reach the age of 18 or 21, depending on the state. They can pay for higher education, start a business, buy a house, or fund other financial goals. But money in an IRA is specifically intended for retirement, meaning someone can face penalties for withdrawing the money earlier. When you’re gifting money to a child in your life, there’s a good chance you want them to be able to enjoy that money before retirement.
  • Earned income requirement: Only those with earned income can contribute money to an IRA. Even if the money is coming as a gift from someone else, the child who is listed as the account beneficiary must have earned income for someone else to make contributions on their behalf.
  • Low contribution limits: The IRS limits contributions to an IRA to $6,000 per year for 2020 and 2021. If you want to gift a child more than that, you’ll have to find other avenues to do so.

How to Get Started Investing for Kids

Ready to start investing for a child that you love? Because of compound interest, there’s no better time to start than now.

If the child you want to invest in doesn’t already have an UGMA account you can easily contribute to (like EarlyBird), here’s how to go about setting one up and funding it:

  1. Set an investing goal: Before putting any money in, decide what your ultimate goal is. Do you want to fund the child’s college education? Or build a small nest egg for them to have fun with? The goal can dictate what type of account you open and which portfolio option you choose.
  1. Choose the right brokerage firm: There are plenty of companies that offer brokerage accounts you can get started with. Consider opting for a specialized firm that does one thing really well. EarlyBird, for example, specializes in offering UGMA accounts.
  1. Open your account: Once you’ve decided your goal, type of account, and provider, it’s time to open the account. You’ll need to fill out some forms and choose the investment portfolio type.
  1. Decide how much you can contribute: Making recurring contributions to your loved one’s investment account can help them reach their goals even faster. Decide how much you’ll contribute upfront, and figure out if a regular monthly contribution is in the budget.
  1. Involve your child in the investing process: One of the biggest perks of investing with your child early is to help teach them and get them excited about money. To help do so, be sure to involve your child in the investing process. First, you can talk them through each step, so they’re aware of what’s happening. They may not understand it all, but you can get it on their radar.
  1. Encourage your child to contribute: Once your child has money of their own, whether from gifts, allowance, or a part-time job when they get older, you can encourage them to invest some of it into their future.

Why EarlyBird?

When investing in the future of a child that you love, EarlyBird is an innovative option that is unique in the financial world.

With EarlyBird, you have one central account that anyone can contribute to. That means parents, grandparents, godparents, friends, and anyone else in a child’s life can contribute to one collective fund that can make a true difference in that child’s future.

What’s more, EarlyBird gives you the option of adding a video message to your contribution gift, creating a lasting emotional statement that can be carried well into the future.

Conclusion

There’s never been a better time to start investing for your child than right now. Getting started earlier helps to set your child up better for their future financial goals.

Investing for a child early will help to instill skills and values they’ll carry with them forever. In a time where financial literacy is on the decline, getting children excited about finances today can help ensure their lifelong financial success.

If you’re ready to start investing for the children in your life, download the EarlyBird app today.