The general advice is to start investing for your child when they are still young. But what investment options will give you most security or revenue? And is investing still a good idea when your child is older? Read more about tax benefits and other wise choices.
As a parent, your kids are the most important part of your life. As such, you want nothing but the best for them. You want their health and education secured. You want to do this without sacrificing your own happiness and financial needs. To invest for your kids, I recommend the following approach.
Start When They are Still Young
The best time to start investing for the kids is when they are still young. Some parents do this even before the kids are born. The benefit of starting early is that it gives you a long runway to achieve financial success. For example, if you save just $50 every month in a savings account, the kid will have $3,000 when they turn five years. Now image using that money for real investments and the money this can generate.
Nevertheless, even though your child is already a teenager, it’s never really too late to start saving for your child. Besides, you can still take advantage of tax deductions and tax-free withdrawals if you choose for plans such as 529-plans. These plans are specially designed to enable children to pay their college and university studies.
Use Smart Investing Platforms
If you are not an experienced investor, you should consider using some of the smart and automatized investing platforms that have come up in recent years. Some of these companies allow you to start investing with as little as $50 a month.
Companies you can consider are Betterment and Wealthfront. Once you deposit your funds, the company’s investment robots will allocate them to stocks and bonds. Wealthfront also offers special 529 investment plans.
Another company called Acorns has a different approach. After linking your credit card, the company will round-off your purchases and invest the change. For example, if you buy snacks for $16, it will take $4 and invest it for you.
Invest in Mutual Funds
Mutual funds are a professionally managed investment fund that unites money money from many investors. Mutual funds have been popularized by the late Jack Bogle, the founder of Vanguard. This company has more than $6 trillion in assets under management. There are many mutual funds to choose from if you want to consider Mutual Funds. Reasons why to choose mutual funds:
- Investing in mutual funds enables you to have a professional money manager invest for you.
- Another advantage is that each fund is made up of many companies, which enables you to be diversified.
- Third, because of the economies of scale, the transaction costs in mutual funds is significantly lower than in other forms of investments.
- Fourth, with mutual funds, you can exit your investment at any time.
Vanguard also provides 529-plan investments. These are an investment accounts that you can use for education savings. The plans are usually sponsored by states and offer great tax benefits.
Invest in index funds
Another option when investing for your kids is to allocate funds in an index fund. An index fund is a type of mutual fund that is created to track an index. Examples of indices are SP 500, Dow, and Nasdaq. Indices like Technology, Utilities, and Telecoms can be sector-specific. Historically, index funds have performed very well. For example, in the past five years, the Nasdaq, Dow, and SP 500 have returned 117%, 61%, and 55% respectively. When you add the dividends and buybacks, the returns are much bigger.
Exchange Traded Funds
Exchange Traded Funds (ETFs) are also well known option of investing for your children. An ETF is a fund that tracks a basket of financial assets. An ETF can own hundreds of companies across the sectors. It can also own stocks that are in the same sector. For example, a technology ETF can own stocks in the technology sector.
In addition, there are ETFs that own other assets. For example, bond ETFs can own corporate or government bonds while commodity ETFs own the commodities. The benefits of investing in ETFs are diversification, lower cost, transparency, and tax efficiency.
If you are an experienced investor, you can pick stocks for your kids. To do this, you can start with a lump sum amount or you can set a specific amount of money that you will be investing every month. The ideal portfolio should be made of two broad types of companies; income and growth stocks.
Income stocks are mature companies like IBM, Procter Gamble, and United Technologies. These companies will provide the portfolio with stock price appreciation and dividends. For example, IBM has a dividend yield of more than 4%, which is a good thing. In addition, you can add some REITs like Eqinix and Crown Castle International. The benefit of investing in Reits is that they will give you exposure to the lucrative real estate industry.
Growth stocks on the other hand are relatively young companies that are growing fast. Mostly these companies are in the technology sector. Their examples are Netflix, Twilio, and Twitter. While these companies have their risks, they tend to expose investors to a lot of returns. For example, growth stocks like Baidu, Facebook, and Twilio have gained more than 2500%, 380%, and 439% as public companies.
As a parent, you will always have a good night sleep knowing that your kids finances are secured. The earlier you start making these investments, the better it will be for you and them.
- The 8 Best Ways to Save Money for Your Child’s Future
- How to Save Money for Your Kids
- Picking the best 529 plan: You’re probably doing it wrong
Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities.