How to Set up Your Kids for Financial Success
If you were raised like I was your primary goal with money was to save it. Any way you could, just save. Get water cups instead of soda, buy from the dollar menu (RIP), and wear jackets indoors in the winter. If we knew about investing we would have bought Apple stock or houses when we were in high school. Well, we are learning and know better now so we will ensure our kids are ahead of their time financially.
One powerful way to do so is by setting them up for financial success through strategic investments you can start right now! In let’s explore five investment strategies that can ensure a secure financial future for your children.
Custodial/Roth IRA
Investing in a Custodial or Roth IRA (Individual Retirement Account) for your child is a powerful way to provide them with a head start on retirement savings. Contributions to a Roth IRA grow tax-free, and since children typically have a longer investment horizon, their investments can compound significantly over time. You can open a Custodial IRA on behalf of their child, contributing up to the child's earned income or the annual IRA contribution limit, whichever is lower. Some benefits:
Start with $1,000 and add $100 every month, due to compound interest, by the time they are 63 they could have over $1,000,000!
They can withdraw $10,000 to purchase their first home penalty-free.
529 Plan
A 529 Plan is an excellent tool for saving for your child's education expenses. These state-sponsored plans offer tax advantages, and withdrawals for qualified education expenses (aka college) are tax-free. You can contribute regularly to a 529 Plan, ensuring that your children have the financial support they need to pursue higher education without the burden of student loans. Facts:
Aspects of plans change by state but you can choose which state even if you don’t live in it.
High contribution limits
Exclusive uses for education savings.
High Yield Savings Account
While not a traditional investment, a High Yield Savings Account can be a secure way to save money for short-term goals or emergencies. You can encourage your children to develop a habit of saving by opening a joint high-yield savings account. This can serve as a financial safety net and teach the importance of setting aside funds for unexpected expenses.
These accounts are special because of the % you can earn. In your typical savings account from JP Morgan Chase your APY would be 0.01%. Now, say you mess with an HYSA from CIT Bank, you’d be getting 5.05%. Imagine you dropped $1,000 into both here’s what you’d get back.
Chase: You made 10 cents
CIT: You made $50.50
It might not sound like much but imagine if you put most of your savings into this kind of account? Imagine it compounding every month. Smart savings vs just throwing it into the mattress or a weak a** % savings account.
Health Savings Account (HSA)
HSAs offer a unique opportunity to invest in your child's health and financial well-being. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. You can contribute to their child's HSA, fostering a sense of responsibility for health-related expenses and providing a tax-advantaged way to cover medical costs. This depends on your provider of course, but if you got it, add what you can!
Credit Cards
Teaching responsible credit card usage can be a valuable lesson in financial literacy. While it's crucial to approach this strategy with caution, introducing your child to a secured credit card with a low limit can help them build a positive credit history. Emphasize the importance of paying off the balance each month to avoid accruing interest and debt.
A few essentials to learn and to teach:
You can add your child as an authorized user to your current credit card and build their credit history from the day they are born.
Credit Card hacking, or usage of credit card points for travel, benefits, or extra cash, can make you and save you thousands. Our last Disney World trip was paid for COMPLETELY with points.
Most Premium Cards have several benefits including their intro offer (ex. 60,000 points for $4,000 spent in the first 3 months), special reward rates based on categories, bonus points using travel portals, and transferring points to popular airline and hotel chains for a discounted price (points are worth more).
See my blog post Credit Car Hacking 101 for more.