Building a Secure Future for your Child Part 3: Exploring Investment Options

Parents, saving for your child’s future is a great first step, but investing can help your money grow even faster over time. If you’re new to investing, don’t worry—getting started is easier than it seems. In this blog, we’ll explore a few simple investment options that can secure your child’s financial future, along with examples that make it easy to understand.

Why Invest Instead of Just Save?

Saving is important, but most savings accounts don’t keep up with inflation. Investing allows your money to grow through the power of compounding. For example:

• If you save $100 a month for 18 years in a traditional savings account with 1% interest, you’ll have around $23,300.

• If you invest the same amount in a portfolio earning an average 7% annual return, you’ll have nearly $43,000—almost double!

Mother, father and son in the image with savings and investment plans.

Investment Options to Consider

1. 529 College Savings Plan

A 529 plan is a tax-advantaged account specifically for education expenses.

• How it Works: You contribute money, which grows tax-free. When your child goes to college, you can withdraw it for tuition, books, and other education-related costs without paying taxes.

• Example: If you contribute $100 a month starting when your child is born, and it earns a 6% annual return, you could have over $50,000 by the time they turn 18.

2. Custodial Investment Accounts (UGMA/UTMA)

These accounts allow you to invest in stocks, bonds, or mutual funds for your child’s future.

• How it Works: The money belongs to your child, and they can access it when they turn 18 or 21 (depending on the state).

• Example: A family friend invested $5,000 in a custodial account and let it grow in an index fund. By the time their daughter turned 21, the account was worth $14,000. She used it to buy her first car.

3. Roth IRA for Kids

If your child has earned income (e.g., babysitting or lawn mowing), you can open a Roth IRA for them.

• How it Works: You contribute post-tax money, and it grows tax-free for retirement.

• Example: If your 16-year-old earns $2,500 in a summer job and you match that amount into a Roth IRA, they’ll have a head start on retirement savings.

4. Low-Cost Index Funds or ETFs

Index funds or exchange-traded funds (ETFs) are great for beginners. They let you invest in a diversified portfolio with lower risk.

• How it Works: Instead of picking individual stocks, you invest in a fund that tracks the market.

• Example: If you invest $2,000 in an S&P 500 index fund when your child is born, and it grows at an average of 7% annually, it could be worth around $6,300 when they turn 18.

5. Bonds for Stability

Bonds are safer investments that provide steady returns.

• How it Works: You loan money to a company or government, and they pay you back with interest.

• Example: Investing $5,000 in a 10-year government bond at 3% interest can grow to $6,719 by the time it matures.

How to Get Started

1. Start Small: Begin with what you can afford—whether it’s $50 or $500 a month.

2. Use Robo-Advisors: Platforms like Betterment or Wealthfront can help manage your investments automatically.

3. Do Your Research: Read about different investment options and choose what fits your goals.

4. Stay Consistent: Invest regularly and let time and compounding do the work.

Over time, these investments can provide your child with the financial freedom to chase their dreams.

Ready to take the next step? Start exploring investment accounts today, and watch your child’s future grow brighter!