One of the brutal facts about children is that they’ll never live under our roofs forever. Sooner or later, your adorable kids will exit the family nest and strike it out on their own. And when that time comes, there’s no telling how their fortunes may turn out.
But as parents, we can always give our children a soft landing by preparing them adequately for the real world. One way to go about that is by investing in their future.
To many parents, investing in a child’s future only entails opening a bank account in their name and making regular contributions to it. However, the concept is way more extensive than that.
We’ve prepared a rundown of the most prudent ways to invest money for your child and possibly set them on the path to financial independence.
1. Give Them the Best Education
‘Education is the key to success’ is a motto shared by thousands of schools worldwide. But despite being one of the most overused phrases within academic circles, this adage still rings true.
Giving your child the best education they can get is an intelligent way to safeguard their future. That’s for the simple reason that knowledge and skills can hardly be lost once acquired.
Note that education as an investment plan for kids doesn’t only entail paying their school fees. It also involves playing an active role in their academic life.
Your parental guidance will come in handy in helping your little ones relate better with their surroundings when they enter the corporate world someday. Besides, you could leverage your experience to help them select the most lucrative career paths.
Since they’re still young, insist on guiding them to enroll for courses likely to be in-demand. These fields include data science, artificial intelligence (AI) & machine learning (ML), mechanical engineering, electrical & electronics engineering, petroleum energy, and agricultural engineering.
2. Nurture Their Talents
Not everyone is destined to be an academic giant. In fact, many of the world’s billionaires are college dropouts. Some never even obtained a high-school diploma.
So, do not let the excitement of gracing your child’s graduation ceremony someday prevent you from noticing their strengths outside the classroom walls.
Now, there are multiple ways to nurture your child’s talents.
First, you must spend more time together to discover those gifts. Constantly monitor what your kid enjoys doing the most, as their destiny may lie.
Once you’ve discovered what your child is good at, help bring out the best in them by praising them when they excel at it. Most importantly, take an active role in supporting their interests.
You could also consider enrolling your kid in a talent management school. Although you may spend considerably more to have your child study at a management center than you would, taking them through regular education, the returns can be ultimately rewarding.
3. Set Them up An Investment Account
This is arguably the best way to invest money for a child. It’s also the most diverse investment option, as numerous accounts exist to explore.
Common ones include;
a) 529 Education Savings Plan
We’ve already mentioned that investing in your child’s education is an ingenious way to prepare them for the future. However, saving enough money to fund your kids’ education may be challenging. And that’s where a 529 education savings plan comes in.
A 529 plan is highly recommended if you’re seeking to save enough money for your child’s future college expenses. This savings plan is straightforward: anyone can open and contribute to the fund. Besides, there’s no maximum contribution limit.
There are two types of 529 education savings plans you could explore, namely;
- Prepaid tuition plans, which allow you to purchase college credits for your child’s future at today’s prices
- Education savings accounts, whereby you set up some money in a savings account and then invest the savings in the market
Education savings accounts are the better option as they give you unhindered access to the funds. Withdrawals from these accounts are tax-exempt, as you use them strictly for qualified education expenses, such as tuition fees, learning materials, and uniforms.
b) Coverdell Education Savings Accounts
Coverdell education savings accounts are similar to 529 plans because contributions are generally tax-exempt. Withdrawals are tax-exempt, as you use the money for qualifying education expenses.
But unlike 529 education savings plans, coverall accounts typically have upper contribution limits. The maximum amount you can contribute to these accounts is $2,000/year/beneficiary.
However, this will depend on your household’s income size. Higher-income households with a modified adjusted gross income (MAGI) of $95,000 to $110,000 or $190,000 to $220,000 annually enjoy lower contribution limits.
c) Custodial Accounts
Custodial accounts can help parents manage various financial assets for their children. All assets in these accounts belong to your kids but are only managed by you.
What makes custodial accounts one of the best child investment plans is that they’re straightforward to start and manage. The assets held in the accounts typically transfer to your child when they attain the age of majority.
There are two major types of custodial accounts, namely;
- Uniform Gifts to Minors Act (UGMA) accounts, which generally hold financial assets
- Uniform Transfers to Minors Act (UTMA) accounts, which can hold fixed assets (such as real estate property and motor vehicles) in addition to financial assets
Common types of assets you may hold in your child’s custodial account include;
- Real estate properties
- Motor vehicles
- Mutual funds
- Exchange-traded Funds (ETFs)
- Life insurance policies
d) Custodial Roth IRA
A Custodial Roth Individual Retirement Account (IRA) is a special custodial account that holds money or other assets earned from part-time gigs undertaken by your child.
Roth IRA accounts attract tax-free contributions. Besides, future beneficiaries can access the contributions after their accounts have been funded for at least five years.
However, any earnings or interests an IRA account generates are inaccessible until the beneficiary attains the age of majority.
e) Joint Brokerage Accounts
Joint brokerage accounts are popular among individuals seeking to undertake business ventures together, such as spouses. However, they’re also one of the best investment accounts for kids.
Having a joint brokerage account with your child gives them higher control over investment decisions. It’s a smart way to familiarize them with trading at a tender age.
Even better, many joint brokerage accounts for kids provide different long-term investment instruments.
4. Establish a Trust
A trust is a legal agreement between a settler and trustee, in which the former places certain assets into a trust and designates the latter to help manage those assets on behalf of their beneficiaries. The beneficiaries are almost always children.
The main reason a trust is considered the best investment account for kids is that most of the assets committed to a trust typically appreciate over time. You might also decide to invest the assets to grow the trust fund.
There are various types of trust you could establish for your kids. Each type has its unique benefits and features.
For instance, a bare trust allows the beneficiaries to access their investment when they turn 18. On the other hand, a discretionary trust gives the trustee the power to determine when the beneficiaries can access their assets.
5. Invest In Saving Bonds and ETFs
Savings bonds are another intelligent way to invest in your kids’ future. This investment instrument is zero-risk and is easy to navigate since you can trade in the bonds online.
But perhaps the biggest drawcard to saving bonds is that they grow tax-free. The bonds only attract federal income tax when redeemed.
In addition to savings bonds, you might also consider investing in an exchange-traded fund.
ETFs operate more or less similarly to mutual funds, except they’re generally traded on stock exchanges. However, ETFs guarantee higher returns and better flexibility since you can quickly trade them using a joint brokerage account.
6. Start a Junior Pension Scheme
Your child’s retirement may be the last thing on your mind right now. But there’s no standard rule on when you should set up a pension scheme for them.
And since you’re already seeking to make the best long-term investment for child, it doesn’t hurt to spare some thought for their retirement.
A junior pension scheme is similar to adult pension schemes because they both have attractive tax benefits. But as expected, junior pension plans have more reasonable tax relief.
Note, however, that the tax advantages applicable to junior pension schemes may vary significantly between the time you set up the scheme and when the beneficiary reaches their retirement age. Besides, your children won’t access the savings until they hit 55.
7. Have a Life Insurance Policy
This may sound like a no-brainer. But it’s still worth highlighting.
For your life insurance to qualify as the best investment plan for child future, you’ll need to make certain modifications to the policy.
The first thing is to spell out your children among the beneficiaries.
Secondly, adjust the policy to eliminate exorbitant attorney and court fees. This will prevent undue expenses that could affect your children’s insurance benefits.
You might also designate a custodian who’ll hold the life insurance policy in their custodial account and distribute the funds according to your wish.
As you may have gathered, starting early is the secret to securing your child’s future. Starting early is really important. It helps build good money habits and strong plans that keep your kids’ future safe. When you follow these tips, you’re not just teaching your kids to be responsible with money, but also giving them the skills to manage their own finances confidently when they grow up.
We hope you can implement these tips to prove your kids’ future against financial pitfalls.