How to Help Your Child Achieve Future Financial Success
Key Points
Teaching basic finances is the most important step parents can take to help their children achieve financial success.
When given enough time to grow, saving just a few hundred dollars a month can quickly grow into a large nest egg through investment compounding.
Before deciding which type of investment account to open for your child, determine how you would want to use the accrued funds.
With the increasing cost of college tuition, home prices, and overall basic necessities, anxious parents might be thinking of ways to help their kids jump-start their savings. We’ve all heard the phrase “There’s no better time like the present!” It’s especially true when it comes to saving and investing.
The biggest hurdle most parents face when attempting to set their children up for financial success is not knowing where or how to start.
Education Is Key
The most important step parents can take is providing their children with basic financial education tools. An easy way to get your children to think about saving (and ultimately investing) is to talk to them regularly about money-related topics. For example, think about discussing what you’re doing when you’re paying bills, grocery shopping , or reviewing your bank account balances.
Giving your children an allowance is a great way to get them hands-on experience with money. Giving an allowance, when done correctly, can teach kids that money doesn’t grow on trees; they’ll need to do something (work/chores) to earn it. More importantly, it’ll teach them that sometimes they’ll need a plan if they don’t have enough money to purchase something right away.
Saving Earlier Is Better
The concept of delayed gratification can be summed up by those famous words: “Rome wasn’t built in a day.” The same can be said when it comes to building wealth. Saving just a few hundred dollars a month can quickly snowball into a large nest egg when given time to grow. (See Figure 1.) If you start saving $2,400 each year starting with your child’s first birthday, the account balance could grow to approximately $118,600 in 20 years compared to just $78,600 if you had waited until age five to start and $43,145 if you started at age 10. Saving early, even if it’s only a few dollars a month, can give your children a leg-up and help them achieve their financial goals.
Assess Your Investment Account Options
Before opening an investment account for your child, it’s typically best to come up with a goal or strategy for the funds you’re setting aside. The type of account you pick can make a significant difference in whether or not you’ll achieve that goal.
If you want the funds to be used for education expenses, consider opening a 529 plan or Coverdell account to take advantage of tax benefits.
Do you want your child to have unfettered access to the account when they become an adult? Opening a custodial brokerage account, such as a Uniform Transfers to Minors Act (UTMA) account or a Uniform Gifts to Minors Act (UGMA) are good options.
Does your child have a part-time job? If so, then opening a Roth IRA account for them and contributing an amount up to the lesser of the child’s earned income or the annual contribution limit for the year would be a great way to help them start saving for retirement. (And, no, it’s never too early to save for retirement.) Assets in a Roth IRA grow entirely tax-free but would be best withdrawn at retirement to avoid possible penalties.
Each of these accounts has a specific purpose and associated benefit. Evaluate your options to ensure you’re making the best selection for your child.
Key Takeaways
As a parent, you want what’s best for your children. You hope your efforts will lead them to be successful, whether it’s attending the best school, playing for the best team, or simply having a better life than you did.
Giving children the opportunity to be successful begins with education. Having a basic understanding of how the world works and the vital role money plays are important building blocks that can ultimately lead to a brighter future. Teaching them about the rewards of saving early to leverage investment compounding and choosing an investment account that aligns with your children’s goals can significantly improve their chances of achieving financial success. Learn more with Capstone Financial Advisors.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.