Many of us learn the lesson, in hindsight, that we should have started our savings and investments far sooner than we did. There are many reasons why we didn't, and a lot of them have to do with the idea that it takes either a lot of money and/or a lot of experience and knowledge. Let's dive into the accessible and worthwhile savings and investment opportunities, so that we can get our kids started early, on the right foot!
BENEFITS OF INVESTING YOUNG
Motivation to greater and longer-lasting savings
Most parents understand the value and potential benefit of helping our kids start saving early. Children enjoy and will learn a lot by saving their own money, and watching it grow as the balance slowly creeps up with every addition.
Are your kids able to maintain the motivation to hold onto their meager savings? Can they last when trying to save up for a desired purchase? Will they restart the savings cycle after the joy of spending?
If they receive a tiny amount of interest for their savings, it can help keep them on track, like a reward, even if mom or dad have to engineer a little extra interest from their own pockets, to give the kids the habit and the motivation to put off spending their money.
Now think of how much stronger and longer that motivation can last, if your kids find higher returns on those savings. Therein lies one of the best reasons to help our children learn about the world of investment; the rewards are usually higher.
Learning About Benefits of Compound Interest in Real Time
Even a basic savings account can teach you how compound interest works. When you leave your savings in a savings account over time, without withdrawing the interest earned, it stays there and will also earn interest, then that interest-on-the-interest will also earn interest.
So there is a strong reason to leave your money there, and let your money keep earning even more money than just the annual rate on your deposits. How much different does compound interest make? Use this calculator to try different numbers. Let your kids see these numbers when they are old enough to appreciate the benefits of growing their savings, and especially once you want to highlight the potential difference with higher rates of return from investments.
Higher Returns on Invested Funds?
So is it a given that investments typically provide higher returns than savings products? In general, yes that is true. Although it may take longer to attain the higher returns, there is a reasonable consensus that the various investment products will provide a higher return than a bank’s savings product.
That's generally because you exchange the safety (of a savings product), and accept a higher risk, in order to potentially end with a better return. There are varying levels of risk that will often translate into varying levels of returns.
Planning on Using Those Investment Funds
As our kids enter their teens, they typically have at best, a lot of short-term goals, but if they’ve become financially literate thanks to you, they will recognize what challenges they face as they prepare to be independent adults. That means, they will be thinking about education, careers, homes, and saving for retirement. Many teens have already heard of adults who are retiring far sooner even than their senior years.
With the rapidly changing landscape of rising costs in housing and education, parents worry about how best to help their children become independent. By showing your children how to optimize the amount of investment years ahead of them, to help them to achieve their goals, you will empower them with more options to plan for their adult lives.
This makes investing at a younger age the more logical choice. Show your children that, even starting a modest monthly investment in your early teens can result in double their portfolio value, than if you start a decade later.
HOW TO INVEST YOUNG
Custodial Investment Account
A custodial investment account is held and controlled by an adult, on behalf of a minor. This type of account by default, passes to the child, once they have reached the age of majority. UTMA and UGMA accounts are available as custodial accounts, depending on what types of assets you wish to hold in that account. UGMA is the typical version of the custodial account primarily used for investment-type products.
There are many advantages to using this format for your children, such as certain tax benefits and great flexibility in the use of the funds. However some savings goals may be better met with different financial products. For example, you may want to re-think using this type of account to fund your child’s college education, depending on your circumstances.
More To Come
Stay Tuned for our second part in the series, where we’ll explore the specific steps to help your kids start their investment adventures.