ASAP: Investing in Children’s Financial Future 

Assuming inflation remains above 4% through the 2020s, a married, middle-income household is now forecast to spend over $300,000 raising a child through high school

Kids may be priceless, but they certainly are pricey. As costs of living increase, the burden of childrearing is only growing. While couples fret over buying a property to shelter their offspring, the cost of a child is fast approaching that of a whole home, per a recent Brookings forecast.

Americans may be having fewer children, but they are raising them for longer. Childrearing rarely stops once kids reach college anymore. As many as one in three parents financially help their adult millennials and Gen Zers children. What’s more, 69% of these supportive parents admit this is putting them under financial pressure, a recent Credit Karma survey found.

Amid the return of major geopolitical conflict, chronic climate disaster, and potentially persistent stagflation, the outlook for the global economy – and the US position within it – looks increasingly vulnerable.

Domestically too, things are looking shaky. Social Security is due to run dry on cash reserves by 2034, earlier than previously anticipated. Tax revenue is forecast to provide only about 78% of annual payouts from then on.

With the shrinking social safety net, there is a growing impetus to financially prepare the next generation and do so earlier – when they are still children.

This article will examine why investing for your kids makes financial sense, the right investment vehicles for your children, and other important factors to consider.

On Their Side

Children may not have income, knowledge, or experience, but they do have time on their side. As any seasoned investor knows, the power of time is the secret ingredient that fuels that magic of compound interest.

Take billionaire investor Warren Buffet as a case in point. Buffet, who got started in investing at age 11, recommends parents begin financial education as soon as possible.

“It’s never too early,” said Buffet in 2013, adding that he learned valuable lessons on money from his father.

“What I learned at an early age from him was to have the right habits early. Saving was an important lesson he taught me.”

There are numerous investment strategies that are testament that can give your offspring a solid start to their financial life.

For instance, one savings stratagem proffered by finance writer Sarah George suggests saving $50 a month for your child from age five. Assuming a 6% annual return through a broad-based index fund, a consistent $50 deposit a month will give your child a $23,000 safety net once they reach college age.

Starting even earlier can work wonders for reaching even longer-term milestones. Many Americans work their lives off in the vain hope of reaching the million-dollar mark one day, yet few get there. As of 2021, just 22 million Americans had crossed that line – less than 10% of the population. Even fewer get there by virtue of their lineage.

According to a survey by Ramsey Solutions from last year, only 3% of American millionaires inherited over one million. While many do not have that kind of money to pass on to their children now (or ever), they can smoothen the road to their child’s first million with the “$7,000 birthday deposit” method championed by influencer Chloe Daniels. She recommends depositing a lump sum of $7,000 on the day of their birth into an index fund. Assuming an annual return of 8%, and reinvested dividends, this nest egg will grow to $1 million when the child reaches age 65.

Investment Vehicles

There are a number of optimal investment accounts for minors.

For investing in the stock market, joint brokerage accounts allow dual ownership, so you can co-pilot your child’s growing wealth over the long term. With these accounts, children can be involved in choosing what equities to buy and sell, enabling the parent to teach them valuable lessons about investing. The account grants equal ownership, and parents can either make their child a “Joint Tenant With Rights of Survivorship” (ensuring the child receives the parent’s half of the account upon death) or a “Tenant in Common” (transferring the deceased parent’s portion to their estate rather than the child).

To give children full control of their nest egg once they come of age, a custodial account is best.

The parental custodian controls these accounts until the child reaches 18 or 21 years old, at which point they take over their account and have full freedom to do with it what they will. One benefit is that it is easy for supportive grandparents, friends, or relatives to make cash deposits, with contributions up to $17,000 per year per person exempt from gift tax. There are two categories of custodial accounts: UGMA accounts (Uniform Gifts to Minors Act) and UTMA accounts (Uniform Transfers to Minors Act), with the former holding financial assets only and the latter also storing cars, homes, and other physical assets.

There are also custodial Roth IRAs for kids. Note there is no age limit for opening this account. As long as the minor earns some income, they may contribute. Though pocket money from chores does not meet the criteria, odd jobs outside the home do. Parents can also match a child’s contribution to a Roth IRA up to the earned income from the child.

By starting early and remaining consistent, parents can leverage the power of time to build their children’s future wealth over the decades. By getting them off on the right foot on their financial journey, parents can give them financial security to survive in a hostile world and instill the timeless lessons of personal finance that can set them up for success through the rest of their lives.

This article was produced and syndicated by Wealth of Geeks.