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Wednesday, February 28, 2024

How we save and invest for our kids’ future

How we save and invest for our kids’ future

06.22.2023

When we began our investing journey 12 years ago, we didn’t realize the impact of starting early. After all, a few thousand dollars wasn’t going to get us to a comfortable retirement.

Today, we’re amazed at how our balances have grown. Compound interest, patience and practicing buy-and- hold investing helped our retirement balances soar to over $500,000 in our late 30s.

If we didn’t contribute another dime for the next 25 years, our retirement accounts could grow to around $2,700,000 (assuming a 7% annual growth rate). That is the power of compound growth.                                

Recently, I started thinking about how this same process could be applied to our kids. With around 60 years before their retirement, 10 years before college, and potentially 20 years before their first home purchase, time is truly on their side.                      

Here’s how we’re saving and investing for our kids’ future — with compound interest, patience, and buy-and-hold investing in mind.                                   

529 college savings account          

With $1.75 trillion in student loan debt in our country, we want to make sure our kids avoid this mess as much as possible.1 That’s why we started investing for our kid’s future college costs with a 529 College Savings Account when they were born.  

For both our daughter and our son, we contributed a lump sum of money to start out their accounts. After that initial investment, we started regular monthly contributions. By doing this, our college investing became automatic.                                               

Based on their current balances and the time horizon to their college start date, we may not have the entire amount needed for four years of college for both kids, but it should cover a lot of it.

We can always:

  • Shoot for scholarships
  • Encourage our kids to work part-time while in school
  • Maybe even have them attend a year or two at a local community college to take care of some of their core classes at a fraction of the price

Custodial brokerage account (UTMA/UGMA)                                    

To get our kids to understand the power of compound interest and investing, we started a custodial brokerage account for each of them a few years ago. This was initially funded as a gift from their late grandmother who wanted them to have something special later in their lives.           

Each month, our kids contribute to their investment accounts through the chore-and-reward program we have at home. In short, they do chores around the house each day and get paid at the end of the week for their hard work – kind of like adult life.             

Although their balances are relatively small today, these accounts could be perfect as a downpayment on their first home or buying their first car in cash in the future.                                

Roth IRA for kids

Since my small business is all about my family, I want to include them in on the fun, too.                                  

My daughter is a regular co-host on my podcast and my son has created videos with me on my YouTube channel. Additionally, they are featured as photography talent in articles and on my website.                                

For this type of work, I can pay them a fair hourly wage for their time. This has allowed us to contribute their earnings to a Roth IRA in each of their names. Talk about getting them started early with retirement investing.

Again, their account balances are small now, but over time, they will potentially grow. By the time they reach retirement age, I’m hoping they will thank their parents for getting them on the track toward a comfortable retirement.

If not, I’m hoping we can at least move in with them…

High-yield cash account                             

Outside of investing, we want to teach our kids the importance of saving for the future as well. Each of my kids have their own high-yield cash account where they save a portion of their chore-and-reward money each week.

Since we’ve been doing this for a few years now, each of my kids has almost $200 in their accounts. So far, they’ve used these accounts for buying things like video games and bikes. In the future, they may want to use their accounts for going on a trip with a friend or buying their first cell phone.

By putting the money into their hands, they are getting the opportunity to learn how to save and spend wisely. Surely they will make mistakes, but I’d rather them make mistakes with $5 today instead of $50,000 when they are in their 20s or 30s.                                 

Talking to our kids about money

The final way we are saving and investing for their future is by talking to our kids about finances regularly. These types of conversations and the experience and knowledge they gain could very well be our best investment for them.

Although I’d love for them to learn and comprehend concepts like investing and compound interest, we’re happy to start with the basics. When the moment strikes, here are just a few of the chats we have:

  • Needs vs. wants
  • The value of giving away some of your money
  • Smart spending habits

From the hundreds of successful parents I’ve spoken to on my podcast, one theme is ever present when I ask how to help our kids be happy, healthy and wealthy in the future: Show them, don’t tell them.                    

One way to accomplish this with older children is by exploring how your money is working for you. Is your spending and saving aligned with your budget? Are your investments allocated for your risk tolerance and retirement planning horizon? As your children get older, you can sit down with them and show them how to manage their own money.

For now, we’re doing our best to be a good example and not just do as we say, but as we do.

When we shop with them, we show them smart spending habits and discuss how we’ve budgeted our money for the purchases we’re making.

If we go on a vacation, we discuss with them how we saved up our money for the whole year to make this trip a reality.

And when we give to charities or our neighbors in need, our kids give alongside us so they can see and learn the impact we’re making together as a family.                                 

Final thoughts on how we save and invest for our kids’ future

Will all these steps help our children grow up to be happy, healthy and wealthy? We hope so, but who knows!             

Our goal is to help them learn the importance of starting early with investing, saving for the important things in the future, and how money is a tool to help you have a great life.      

Only time will tell if our tactics work. We’re amazed at how they’ve worked for our lives so far, so we’re excited to give it a shot for our kids. That way, we’re strengthening our family tree for generations to come.

1 Forbes, “2023 Student Loan Debt Statistics: Average Student Loan Debt,” May 2023.

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Andy Hill

Contributor

Andy Hill, AFC®, is a husband and father of two kids. His personal finance goal: To give his family the best life possible and strengthen their family tree for generations to come. In 2016, he launched Marriage Kids and Money, a blog and podcast about young family finance. In 2020, he and his wife achieved a personal goal of becoming millionaires in less than 10 years. Now, he thrives on helping others do the same.

 

 

Author is not a client of Empower Advisory Group, LLC, and is compensated as a freelance writer.

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