Recently, my daughter’s $80 vanished into thin air, presumably lost somewhere between her bedroom and a donation box during a household cleanup. This mishap led me to ponder a more secure and growth-oriented place for her to stash her sporadic earnings.
From chore money to birthday cash, she’s been saving more than she spends. Could an investment account be the next step?
Introducing children to investing not only teaches them about money management early on but also sets them up for a prosperous future. Here’s how you can kickstart your child’s investment journey while keeping it simple and engaging.
Setting Up the Right Investment Account
For young investors, options like the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA) accounts provide a solid foundation. These accounts require an adult custodian—likely you—to oversee them until your child reaches adulthood, which could be either 18 or 21, depending on your state. Once set up, the money in a UTMA account is legally your child’s and must be used for their benefit only.
Opening a UTMA account is straightforward. Visit your local bank or credit union, or set one up online with investment firms like Vanguard. Alternatively, consider a UTMA 529 plan if college savings is a priority, which offers tax benefits but comes with spending restrictions.
For a more modern approach, micro-investing platforms like Stash or Stockpile are ideal for starting small. These platforms are user-friendly and can integrate with apps like BusyKid, which tracks chores and manages allowance digitally.
Additionally, linking a checking or money market account with the investment account can facilitate the transfer of funds and collection of dividends.
Exploring Investment Options
Once their account is ready, children can access a variety of investment vehicles. Whether it’s mutual funds, individual stocks, or exchange-traded funds (ETFs), the choice depends on their initial capital, interest in active investing, and personal preferences.
For kids keen on tracking companies and active investing, purchasing individual stocks is a tangible way to understand market dynamics. Opt for a brokerage that offers low or no minimum deposits and minimal trading fees. However, it’s important to teach them that for long-term growth, investing in diversified funds is generally safer than betting on individual stocks.
If they prefer a broader market approach, starting with a mutual fund like an S&P 500 index fund is advisable. These funds often have low expense ratios, allowing your child to retain more of their investment gains. Some funds may require a minimum investment, but there are always ways around these, such as monthly contributions until the minimum is met.
ETFs are another excellent option, similar to mutual funds but typically with lower entry costs.
Micro-investing apps also offer a simplified investment experience by allowing purchases of fractional shares of stocks or ETFs, categorized for easier understanding. These apps do charge a monthly fee, but the ease of use can be worth the cost for beginners.
Investing in Treasury bonds or certificates of deposit might also be considered, though the current low interest rates might not be as engaging for young investors.
By guiding your child through these steps, you’re not just helping them secure their financial future—you’re also teaching them valuable life skills in responsibility and planning.
