Easy Guide To Open A Brokerage Account: Investing for Children
Instead of assisting their children in purchasing the latest toy on the market, parents should view this as an opportunity to teach their children that money is more than just a tool for buying things and start opening a brokerage account.
When children start saving money, they must decide what to do. Their attention may be drawn to a particular toy.
When children learn the lessons of investing at a young age, they also learn about the pitfalls and consequences of poor financial and investing decisions. More importantly, they are given an early opportunity to build their wealth.
As adults, they can make wise financial decisions and investments that will guide and benefit them for the rest of their lives.
Parents considering investing in their children should involve their children in the process and consider the following issues:
Why You Should Begin Investing in Your Children
- Goals and Expected Outcomes
-
Financial Literacy Education for Children
- Compound Interest and the Power of Time
How to Set Up a Brokerage Account for Your Child
- Select a Brokerage Account Type
- Select the Best Broker
How to Explain Investing to Your Child
Why You Should Begin Investing in Your Children
We all know today’s kids will someday head households of their own. Please prepare children for this role to avoid problems in the future, as investing is likely to become the vehicle through which they build wealth and finance future needs.
Personal Economic Situation
Your financial situation impacts almost every aspect of your child’s life. It influences where they live, the school they attend, and the clothes they wear. Parental guidance is essential for a child to understand where they came from and what it takes to live a healthy lifestyle.
Because children develop their attitudes towards money during childhood, your situation impacts your child’s financial future.
As a result, improving your finances by paying down debt and sticking to a budget may also benefit your children. You could even involve your children in financial decisions.
As they see your budget constraints and goals, they will be able to understand better how to limit spending and set financial goals for themselves when the time comes.
Goals and Expected Outcomes
Having a family entails several financial goals, such as saving for a home, sending children to college, and retiring comfortably. Meeting these objectives can be difficult for those needing investment return access.
However, parents can use their struggles to teach their children to start investing early. Whatever path these children take in life, they will likely have many of the financial goals you are pursuing now.
As they see you pay off debts and save for their education and retirement, they can see how to create the financial stability that will help them.
Financial Literacy Education for Children
In an age when pensions are scarce, children must learn investment skills. Despite this, most students will graduate from high school, never taking a personal finance or investing class.
According to the Consumer Financial Protection Bureau, only about 10% of 15-year-olds are “top performers” in financial literacy.
When teaching their children, parents should keep things simple. First, assist your children in developing a budget, with a portion designated for savings.
After they’ve saved up enough money, teaching them about investing is an essential next step.
Compound Interest and the Power of Time
Children are well placed to benefit from the power of compound interest. The original principal is used to calculate compound interest as well as past returns.
For example, at a 5% annual interest rate, $100 will grow to $105 in one year. The depositor will earn interest on $105 the following year, resulting in a $110.25 balance after two years with no additional investment.
That may seem like little, but starting early yields exponentially higher returns.
CNBC determined in 2017 that the S&P 500 had delivered an average annual return of 9.8% over the previous 90 years.
The table below shows how relatively modest, but early investments grow year after year when that 9.8% return is reinvested:
| Growth in Retirement Savings | ||
| Age | Contribution | Total Balance |
| 16 | $3,000 | $3,294 |
| 17 | $3,000 | $6,911 |
| 18 | $3,000 | $10,882 |
| 19 | $3,000 | $15,242 |
| 20 | $3,000 | $20,030 |
| 21 | $0 | $21,993 |
| 30 | $0 | $51,016 |
| 40 | $0 | $129,937 |
| 50 | $0 | $330,946 |
| 60 | $0 | $842,908 |
| 65 | $0 | $1,345,217 |
In comparison, someone who invests $3,000 annually for five years beginning at 50 will only have approximately $46,060.
Kevin O’Leary of “Shark Tank” taught his children about compounding by putting a few pennies in a glass piggy bank each night. His children quickly discovered that money creates money.
Such knowledge provides children with a powerful tool and enables them to fund their retirement with significantly less investment than those who begin later.
How to Set Up a Brokerage Account for Your Child
Having a brokerage account is one way for children to learn about investing. Although many free options and investment apps are available, a beginner investor brokerage account is better suited for children.
The type of brokerage account required is determined by the child’s income and investment objectives.
In most cases, you or another trusted adult can be the custodian of a brokerage account opened in your child’s name.
Select a Brokerage Account Type
A Uniform Gifts to Minors Act or Uniform Transfers to Minors Act brokerage account may be a good option for a child with no income. A UGMA account allows an adult to give little cash or securities. An adult chosen by the donor or a custodian manages the funds.
This type of brokerage account also covers assets given to a minor and managed by a custodian.
However, UTMA accounts have a broader definition of assets. UTMA assets may include real property in addition to gifts covered by UGMA.
Minors can claim complete control of the brokerage account when they reach majority status, such as adulthood. The exact age varies by state.
Children who earn money can contribute to an individual retirement account because there is no minimum age requirement. The IRA account, like the UGMA account, is a brokerage account that will be managed by an adult until the child reaches the age of majority.
Select the Best Broker
Having the right financial advisor can be critical to achieving financial success.
Suppose you decide to work with an advisor. In that case, the most crucial criterion is that the advisor is a fiduciary someone who is required by law to put the interests of their clients ahead of their own and is paid a fee for their services rather than a commission on sales.
A certified financial planner is one type of advisor. CFPs must meet ethical and competence standards to earn and keep their designation. The National Association of Personal Financial Advisors also designates fee-only advisors.
Such guidance can not only help a child’s wealth grow while keeping the principal safe, but it can also help a child gain a head start on the way to achieving your financial goals.
How to Explain Investing to Your Child
Your children may benefit from learning the fundamentals of investing as they assume more adult financial responsibilities.
Parents should begin by opening a savings account on their child’s behalf and teaching the child to divide their funds between the money they can spend, money they can donate to, and money they’ll save because a child must first accumulate the funds to invest.
It’s time to open a brokerage account and begin investing once the child has sufficient savings.
The same rules that apply to adults apply to children who want to get invested and see their brokerage account values increase over time:
more time spent in the market results in longer-term growth. You can make it a point to discuss the account values with your child as they move from their preteen to high school years and as any stock splits or dividends are announced.
Stick with long-term investments rather than risky ones like day trading, even though the invested money could be used to buy any car the child can afford.
This could entail investing in the money market or savings bonds before moving on to the stock market, where you can search for exchange-traded funds, index funds, or mutual funds with diversified holdings and histories of steady growth.
Early education is essential, regardless of the investment choice. With the help of these lessons, kids can grow up to be adults who understand how to amass wealth by investing their savings in ways that reduce risk and enable them to benefit from a stable financial future.
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