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TL;DR: Starting to save for your child's future can be broken down to 3 steps: start saving, start investing, and grow your investments. The most important thing is to just start.
With so many options out there, you might be asking yourself – where do I start?
Don’t beat yourself up. Rome wasn’t built in a day and saving for your child’s future is a journey with many steps.
We put together this guide to help you with actionable steps for building your kid’s savings for the future. Start with the level that fits your current status and check back in on a yearly basis to see if you are ready to move to the next level.
If you think you don’t have enough money to start, you’re not sure of the best savings option, or just haven’t gotten to it yet, this is the place to begin. Saving as little as $500 can increase a kid’s chances of graduating from college by as much as 5 times.
The best way to start is to start. Put money aside for your child in a different savings account, checking account, separate digital savings bucket, or even cash in an envelope. It doesn’t matter where, as long as you put it aside and know that the funds are for your child’s savings.
The goal here is to build a starter fund, even if it’s $500, and turn saving for your child into a habit.
The goal here is to build a starter fund, even if it's $500
If you’re not sure how to afford putting money aside, start with unexpected income such as gifts, your tax return, a bonus from work, or other unexpected money that comes your way.
It’s been proven time and time again; automation is the best way to save money. We can all become forgetful (or even lazy) about constantly managing our finances, so it’s best to use tools that help save effortlessly.
Start by automatically moving money to a savings account every month. Look at your budget and see if you can start with $50 per month (or more if you can). If not, start with any amount, and check back in every year, to see if you can increase it. Starting with $10 per month can get you to that $500 goal, and you can reach it even faster with more tools.
Use additional technology to boost your savings even more, like rounding up spare change from purchases, or setting up automatic “surprise savings”. Smart saving features are the new saver’s best friend. Find a list of our favorite saving tools here.
Some banks offer savings accounts that pay you interest on your account balance. A high yield savings account means the bank pays more interest than the average bank, translating to more dollars per year for you. Discover great high yield savings accounts that take a few minutes to open online right here.
By now, you should have about $500 in a starter fund set aside for your child’s future, and that’s more than enough to take your savings game to the next level. It’s time to put your money to work for you.
It's time to put your money to work
While high yield savings are good, investing the savings can provide a much higher return, and has the potential to double your child’s savings over the course of 18 years.
Starting to invest can seem complicated or intimidating, but managed investment accounts are beginner friendly, and provide a way to start earning money quickly with no prior knowledge required.
With a managed account (some call it a “robo advisor” account) you get to invest in the stock market without having to pick and choose individual stocks or bonds for the price of a small management fee (think 0.3% of your account balance per year in return for an average annual 7% in profits).
Don’t forget to keep investing any financial gifts you receive for your child. Gifts can provide a great an additional boost to your overall investment portfolio, and family and friends love to give gifts with purpose.
Taxes are the worst. Luckily, saving for your child’s future can have some tax benefits with tax-advantaged investment accounts.
A 529 plan allows you invest for K-12 tuition (tuition from kindergarten to the 12th grade) and college in a tax-free way, similar to retirement investment accounts. Specifically, you won’t have to pay capital gains taxes on your investment’s earnings, as long as you use the investments to pay for school expenses. Some plans also offer deductions for state taxes on contributions to the account. This can mean thousands of dollars in savings.
Direct 529 plans (plans you can enroll to without an advisor) offer different investment plans that don’t require your active management, making it even easier to invest with them.
Custodial investment accounts are investment accounts that are officially owned by your child and managed by you. This means that the earnings for these accounts are taxed at your child’s income level, not yours, and can potentially save you money on taxes.
Most managed investment accounts will ask you for your investment strategy, goals, timeline, and risk appetite in order to recommend an investment portfolio or asset allocation. This determines the type of investments that will be made in the account (percent of investment in stocks vs bonds, mutual funds, and ETFs).
When you’re investing for your child, time is on your side. Consider choosing an aggressive investment portfolio that has more stocks, and potential for high returns. As your child ages and nears adulthood, switch the portfolio to a more balanced portfolio with lower risk and less volatility.
Most direct 529 plans offer investment plans that provide exactly this – they change the investment allocation based on the child’s age automatically.
Use the money you have in the savings account to start investing and earning more money for your child’s future, but don’t completely abandon your high yield savings account just yet.
You should start diverting your auto savings from the savings account into your new investment account, while maintaining a small amount in the savings account. You can replenish the account when you do use the funds from there.
Your child’s savings account can be used as an emergency fund for any unexpected expenses immediately, without needing to sell any investments.
It can also be used to teach your child about savings, and to encourage your child to deposit savings into the account when the child is older and starts working.
The savings account can also be used as the starter funds for your child’s adult life, providing peace of mind and avoiding going into debt. This starter fund will motivate your child to keep saving and encourage them to work towards future savings goals of their own, like putting a down payment on a house, or saving for a wedding.
At this point, you are participating in the stock market through managed investment.
You may be looking to get more control of your investments, or maybe you started listening more carefully to financial news and have your own investment strategy ideas.
Most people can gain enough by participating in the stock market through managed funds, but if you still want to get active, let’s look at how you can take your investments to the next level.
The first step when starting to trade on your own should be to learn more. Start with one company that you are familiar with, a company that works in an industry that you understand, and start tracking news about the company.
Listen in on board meetings and try to read about their strategy. Look for a company with a business that you can understand, so you can make educated decisions on whether the company will do well in the years to come.
Most people can gain enough by participating in the stock market through managed funds
Learning from others and sharing experiences are great ways to learn more. People love talking about stocks and investments. Try talking with your friends about their favorite trading platforms, tools, investment strategies, and favorite stock picks. Join online blogs and groups, or even an investing social network that allows trading and sharing of investment ideas.
Advice from experienced traders and brokers can be invaluable. Try to find a mentor in the space, such as someone you have a good relationship with that has a little more experience with investing. Another option is to make trades with live support from seasoned brokers, an option most brokerages offer at different prices (and one even offers this for free).
When you are just starting active trading and investing, we suggest starting with a small percentage of your total investments for active trades, say 5% or 10% (so if you have $10,000 in the stock market in managed funds, start with $500 or $1,000).
Stock prices can seem pricey (Amazon stock is priced at more than $3,000), but many trading platforms offer a solution for this –fractional shares trading. Fractional shares are fractions of a share, and some trading platforms allow you to buy and sell these smaller pieces of stocks. That means you can choose how much to invest in any stock, and buy a slice of the stock instead of the whole thing.
Start your active trading with fractional shares, or buy ETFs, for a lower risk and practice, until you feel more confident.
We suggest starting with a small percentage of your total investments for active trades, say 5% or 10%
If you follow the steps in this guide, you should be on the right track to saving for your child’s future and setting up your child for success. Savings should feel more attainable now, whether you are saving for college, wedding expenses, a down payment for a house, or starter funds for your child’s adult life.
Your children will know they have savings for them, and that feeling alone can change their lives.
Remember to celebrate the milestones along the way and enjoy the journey. Have a positive mindset. Time is your best resource when saving for your child, and it’s never too late to start.