The key to long-term investing is to start early and contribute consistently.
Unfortunately, by the time many of us truly understand this advice, we’re already well into adulthood, having missed out on a good stretch of time during which we could have been investing. But as parents and guardians, we can learn from experience and begin investing for kids early—along with giving the kids in our lives a financial head start by talking with them about money. While there’s no single best way to invest for a child’s future, most people would agree that beginning early and investing consistently over time is most likely to yield the greatest results.
When you’re thinking about financial planning for a child’s future, it’s a good idea to think about opening a savings or investment account for that child. This will help them grow a nest egg that can later be used for major expenses, such as paying for college tuition or making a down payment on a first home.
When the child in your life is old enough to take an interest in personal finance, you can use those types of accounts as teaching tools to help them understand saving and investing. And that might begin earlier than you’d think: did you know kids start forming ideas about money around the age of three, with many of their money concepts firmly in place by age seven? Talking with them early and often about money, and gradually introducing them to the concept of investing, can encourage them to contribute on their own once they’re old enough—and can help foster healthy long-term financial habits.
Getting started with financial planning for your child’s future
There are a number of different ways to start investing for the kids in your life. As you search for the best way to invest for your child’s future, keep in mind your saving and investing goals. This will help you choose which types of accounts may be best for you and your family.
Tax-advantaged education accounts: Both Coverdell education savings accounts (ESAs) and 529 plans allow you to invest money to be used exclusively for tuition and other education-related expenses in the future. Tax advantages and contribution limits vary. For parents concerned about paying for college, these plans can offer a way to stay focused on saving for education.
Custodial Individual Retirement Account: If your child has earned income, you can help them invest it in a custodial IRA. You may open either a traditional or Roth IRA. As the custodian, you manage the assets for your child until they reach age eighteen, or twenty-one in some states.
Custodial brokerage account: To give your kids the experience of investing and learning about the market, you can open up a custodial brokerage account. These accounts are made possible through the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA) and are often known by those names. The availability of either account will depend on the state in which you reside. Through a custodial brokerage account, you can include your child in decisions about basic investing. While they can weigh in with their thoughts, you ultimately have control of the account until they reach a certain age—usually 18, though this can vary.
Why investing for kids’ future is important
Giving the kids in your life a leg up with money—and money smarts—can go a long way toward helping them achieve their goals, whether that means attending college, starting a business, buying a home, or traveling the world.
Starting to invest early also allows you and the children in your life to take advantage of compound interest— which is basically interest based on the original amount plus previously earned interest. Compound interest can dramatically increase overall earnings over time. So the longer the child in your life is able to invest, the greater their opportunity to benefit from compound interest.
How to explain investing basics to kids
The conversation about investing that you have with the kids in your life will depend on their age, maturity level, and interest in personal finance. You might begin by explaining that investing in a stock is really a way of owning a very small piece of a company. Tell kids that when you invest in a stock, you receive a certificate (either digital or on paper) that shows how many shares, or units of stock, of that company you own. When kids are ready, you can move on to a more detailed explanation, such as how a stock works.
Tell kids that when a company performs well, it’s worth more—so the stock you own in that company is worth more. Explain that if your stock gains value, you can sell your stock and make a profit. Also explain that stocks can go down in value as companies struggle or businesses slow down. Tell kids that if you sell a stock when the value has decreased, you’ll lose money.
From here you can explain more complicated topics, such as risk and reward. For example, investors hope that stocks will go up and they can sell at a profit, but that’s not always the case. You can also explain the (important!) idea of diversifying—not putting all your eggs in one basket—to help mitigate risk. You can begin to explain the different types of investments that could make up a financial portfolio, such as bonds and mutual funds.
Central to any discussion of finance with kids should be the way that investing fits into a larger program of healthy personal finance and long-term financial stability. Check out the Stash Way to learn more.
How to get kids interested in their financial future
Many young children may have a hard time internalizing the importance of saving for retirement when they’ve never worked a job or paid their own rent. (Pro tip: on Stash101, K–12 kids can get a classroom job, earn a simulated paycheck, pay virtual rent, and save simulated money—all in a safe environment. Tell your kids’ teachers about it—it’s free!)
Regardless of their experience, kids can understand that saving money can help them reach specific goals. With your help, they can begin to:
- Invest for shorter-term goals.
Encouraging your kids to save for things that are important to them can help them experience the satisfaction of setting a financial goal and reaching it. For example, even if they’re still a few years away from getting their license, your middle-schooler may be ready to start saving up for their first car—or younger kids might want to save up to buy a bike. Saving and investing over a few years can help them understand the balance of risk and reward, as well as market fluctuations. - Choose familiar single stocks.
Explaining to your kids that they’re able to own a small piece of a company they’re familiar with, such as Coca-Cola or Nintendo, is sometimes the quickest way to get them interested in investing. From there, you can explain that by owning a small bit of that company, they’ll get to share in the profits the company earns, if and when it earns profits, by way of dividends. While the stock prices of many major companies would normally put them out of reach for young investors, some companies, including Stash, allow investors to purchase fractional shares of thousands of top stocks.
How to open a custodial account
Before you open an investment account for your child, consider your family’s goals. These will help dictate what type of account you may want to open. Are you trying to save for college expenses in a 529 plan, or do you want to teach your child about investing for retirement in a custodial account? You may even want to open multiple accounts.
When you subscribe to Stash+ ($9/month), you can create two custodial accounts—and there are no investing minimums. Plus, you and your kids will gain access to Stash’s educational content to help you make informed decisions about their financial journey.
Investment advisory services offered by Stash Investments LLC, an SEC registered investment adviser. Investing involves risk and investments may lose value.Fractional shares start at $0.05 for investments that cost $1,000+ per share.
Stash offers three plans, starting at just $1/month. For more information on each plan, visit our pricing page.
Stash Subscription fee starts at $1/ month. You’ll also bear the standard fees and expenses reflected in the pricing of the ETFs in your account, plus fees for various ancillary services charged by Stash and the Custodian. Please see the Advisory Agreement for details. Other fees apply to the bank account. Please see the Deposit Account Agreement.
Roth IRA: Withdrawals of the money (Contributions) you put in are penalty and tax free. Prior to age 59½, withdrawals of interest and earnings are subject to income tax and a 10% penalty. All earnings are tax free at age 59½ or older, assuming your first contribution was more than 5 years prior. Income Eligibility applies.
Traditional IRA: Withdrawing prior to age 59½, generally means you’re subject to income tax and a 10% penalty. Withdrawals after age 59½ are only subject to income tax but no penalty.“Kids Portfolio” is a custodial UGMA / UTMA account. Money in a custodial account is the property of the minor. This type of account is a Non-Discretionary Managed account.
