Investing for Kids Made Easy: 6 Accounts to Kickstart Their Portfolio
Investing for kids isn't just about money - it's about empowering the next generation with financial literacy and the tools to build long-term wealth.
In this guide, we'll explore:
The best investment accounts for kids, from custodial accounts to 529 plans
How to teach kids about investing through hands-on experience and real-world examples
Kid-friendly investment apps and platforms that make it easy to get started
And more!
Whether you're a parent, grandparent, or mentor, you'll discover practical strategies to help the children in your life develop healthy financial habits and start investing for their future.
Let's dive in and explore how to make investing for kids simple, engaging, and rewarding.
Best Investment Accounts for Kids to Grow Their Wealth
Custodial accounts and 529 plans offer flexible options for investing in a child's future
Start investing for kids as early as possible to maximize growth potential
Encourage hands-on learning to help kids understand the basics of investing
Custodial Accounts: Giving Kids Early Control Over Investments
Custodial accounts, such as Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts, allow parents to transfer assets to a minor while maintaining control until the child reaches the age of majority. These accounts offer flexibility in investment options, including stocks, bonds, and mutual funds.
According to a 2021 survey by T. Rowe Price, 44% of parents have opened a custodial account for their child. The survey also found that parents who started investing for their children before age 10 had saved an average of $27,000 more than those who started after age 10.
When should kids start investing?
Financial experts recommend starting to invest for children as early as possible to maximize the power of compound growth. "The earlier you start, the more time your money has to grow," says Ksenia Yudina, founder and CEO of UNest, a mobile app that helps parents invest for their children's future.
529 Plans: Tax-Advantaged Savings for Education Expenses
529 plans are state-sponsored investment accounts designed for education savings. Contributions grow tax-deferred, and withdrawals for qualified education expenses are tax-free. Some states offer tax deductions or credits for contributions.
As of December 2022, total assets in 529 plans reached $411.5 billion, according to the College Savings Plans Network. The average 529 plan account balance was $25,966.
How do I invest $1,000 for my child?
If you have $1,000 to invest for your child, consider opening a custodial account or 529 plan. "With $1,000, you can open a custodial account at most online brokers and invest in a diversified portfolio of low-cost index funds or ETFs," says Tony Matheson, CFP, founder of Matheson Financial Partners.
Starting to invest early and consistently, even with small amounts, can have a significant impact on a child's financial future. By opening custodial accounts or 529 plans, parents can give their children a head start on building wealth and learning about investing.
How to Teach Kids About Investing Through Hands-On Experience
Engage kids in practical investing activities to build financial literacy
Encourage them to invest their own money and participate in family investment decisions
Use age-appropriate resources and tools to make learning about investing fun and accessible
Encourage Kids to Invest a Portion of Their Allowance or Earnings
One of the most effective ways to teach kids about investing is by encouraging them to invest a portion of their own money. Whether it's from an allowance, birthday gifts, or part-time job earnings, having skin in the game helps children understand the value of investing and the potential for growth over time.
Start by helping them set financial goals, such as saving for a new bike or building a college fund. Explain the power of compound interest and how starting early can lead to significant wealth accumulation. Use online calculators or spreadsheets to demonstrate how their money can grow with consistent investments.
Teach basic investing concepts like diversification, risk vs. reward, and long-term thinking. Emphasize the importance of spreading investments across different asset classes and not putting all their eggs in one basket. Discuss how taking on more risk can potentially lead to higher returns but also the possibility of losses. Encourage a long-term mindset and the patience to ride out market fluctuations.
Kid-Friendly Investment Resources
To make learning about investing fun and engaging, use kid-friendly resources like:
Books: "The Motley Fool Investment Guide for Teens" by David and Tom Gardner, "How to Turn $100 into $1,000,000" by James McKenna and Jeannine Glista
Games: "Cashflow for Kids" by Robert Kiyosaki, "The Stock Exchange Game" online simulation
Online Courses: "Money Missions" by BusyKid, "FamZoo" family finance app
These resources break down complex financial concepts into easy-to-understand language and interactive formats suitable for children of various ages.
Involve Kids in Family Investment Decisions
Another way to provide hands-on investing experience is by involving kids in family investment decisions. This not only helps them learn practical skills but also fosters a sense of responsibility and ownership over their financial future.
Explain your own investment strategies and the reasoning behind them. Share why you chose certain stocks, bonds, or funds and how they align with your goals and risk tolerance. Be open about both successes and failures to help kids understand that investing involves both wins and losses.
Let kids help research and pick stocks or funds for their custodial accounts. Teach them how to evaluate companies based on factors like revenue growth, competitive advantage, and industry trends. Encourage them to think critically about their investment choices and not just follow the crowd or get swayed by short-term hype.
Review account statements together and discuss performance over time. Celebrate gains but also use losses as teaching moments to reinforce the importance of diversification and sticking to a long-term plan. Help them understand that investing is a marathon, not a sprint, and that patience and discipline are key to building wealth over time.
Hands-On Investment Platforms for Kids
Consider using investment platforms designed specifically for children and families, such as:
Greenlight: Offers a debit card and investing app for kids, with parental controls and educational resources
Stockpile: Allows kids to buy fractional shares of stocks and funds, with a gift card funding option
Acorns Early: Automatically invests spare change from linked credit or debit card purchases into a diversified portfolio for kids
These platforms make it easy for kids to start investing with small amounts of money and learn by doing in a safe and supervised environment.
Here's a chart demonstrating the power of compound interest and the benefits of starting to invest at a young age. This chart shows how an initial investment of $1,000 grows over 20 years with a 5% annual interest rate. The key takeaway is that starting to invest early allows for more time for the investment to grow, leveraging the power of compound interest to build significant wealth over time.
Compound Interest Over Time
By encouraging kids to invest their own money and involving them in family investment decisions, you can help them develop valuable financial skills and habits that will serve them well throughout their lives. With the right resources and guidance, investing can become a fun and rewarding learning experience for the whole family.
Investment Gifts for Children That Keep on Giving
When it comes to teaching kids about investing, hands-on experience is key. By giving them investment gifts, you not only help them build their portfolio but also instill valuable financial lessons that will serve them well into adulthood. Let's explore two popular investment gift options for children: stocks or mutual fund shares and savings bonds.
Stocks or Mutual Fund Shares
Giving a child shares in a company or mutual fund can be an exciting way to introduce them to the world of investing. Here are some tips:
Choose companies or funds that align with the child's interests, such as their favorite toy maker or a fund focused on technology. This will make the investment more engaging and relatable.
Consider dividend-paying stocks, which can provide regular income that can be reinvested to help the child's portfolio grow over time. For example, if you invest $500 in a stock with an 8% annual return, it could grow to over $18,000 by the time the child turns 18.
Explain how owning shares makes them a part-owner in the company, giving them a sense of pride and connection to the business.
Savings Bonds: A Safe, Long-Term Option
For a more conservative investment gift, consider savings bonds:
Series EE and Series I bonds are backed by the U.S. government, making them a safe and reliable choice. The current fixed rate for I bonds issued from May 1, 2024, to October 31, 2024, is 1.30%.
These bonds earn fixed interest rates over 30 years and offer tax benefits when used for education expenses. For instance, the interest earned on savings bonds is not taxed if used for qualified education expenses.
Savings bonds can be purchased in smaller denominations, making them an affordable gift option for various budgets. You can purchase paper Series I savings bonds in denominations of $50, $100, $200, $500, and $1,000.
Now, you may be wondering, "How do I invest $1,000 for my child?" When deciding between stocks, mutual funds, or savings bonds, consider the following factors:
Risk tolerance: Savings bonds are generally less risky than stocks or mutual funds.
Time horizon: With a longer investment timeline, stocks and mutual funds may offer higher growth potential.
Personal preferences: Choose an investment that aligns with your values and the child's interests.
To help you make an informed decision, we'll be comparing these investment options based on several key criteria:
Potential for growth and returns
Ease of setup and management
Risks and safety features
Tax benefits and implications
Flexibility and liquidity
Educational value and engagement for the child
By carefully evaluating each investment option against these factors, you'll be well-equipped to choose the best investment gift for the child in your life. In the following sections, we'll take a closer look at how stocks, mutual funds, and savings bonds stack up in each category, helping you make a confident decision that will set the young investor on the path to financial success.
Kid-Friendly Investment Apps and Platforms
Introducing your child to the world of investing early on can set them up for a lifetime of financial success. Fortunately, there are several kid-friendly investment apps and platforms that make it easy for parents to get started.
Acorns Early: Automated Investing for Kids
Acorns Early is a custodial account that parents can open for their children. The app allows you to set up recurring investments and offers a diversified portfolio of ETFs based on your child's age and risk tolerance. One of the standout features of Acorns Early is its educational content and games, which help teach kids about financial literacy in a fun and engaging way.
BusyKid: Combining Chores, Allowance, and Investing
BusyKid takes a different approach by combining chores, allowance, and investing into one app. Parents can assign chores and pay allowance through the app, and kids can then choose to save, spend, donate, or invest their earnings. BusyKid offers fractional shares of stocks and ETFs, but all trades require parental approval.
Acorns Early vs. BusyKid: A Comparison
Acorns Early vs. BusyKid
Both apps offer valuable features for introducing kids to investing, but Acorns Early stands out for its automated investing, diversified portfolios, and educational content. By making investing simple and accessible, Acorns Early helps kids build a strong foundation for their financial future.
Understanding the Basics of Investing for Kids
Learn key concepts like compound interest, diversification, and risk vs. reward
Discover why investing is crucial for building long-term wealth and financial literacy
Explore age-appropriate strategies for introducing kids to the world of investing
What Is Investing and Why Is It Important?
Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. When you invest, you put your money into assets such as stocks, bonds, mutual funds, or real estate, with the goal of seeing your money grow over time. This growth can come in the form of capital appreciation (the value of your investments increasing) or income (receiving dividends or interest payments).
Investing is important because it allows your money to work for you and potentially grow faster than it would in a traditional savings account. Over the long term, investing can help you beat inflation and build significant wealth. According to a 2021 study by Fidelity Investments, the average 401(k) balance for individuals who have been investing for 10 years is $328,200, compared to just $95,600 for those who have been investing for 5 years.
The Power of Starting Early
One of the most compelling reasons to start investing for kids is the power of compound interest. When you invest money, you earn returns not only on your initial investment but also on any interest, dividends, or capital gains that accumulate over time. The earlier you start investing, the more time your money has to grow.
For example, let's say you invest $10,000 for your child when they're 10 years old, and the investment earns an average annual return of 7%. By the time they turn 60, that initial $10,000 investment will have grown to over $290,000, without adding any additional money. In contrast, if you wait until your child is 30 to invest that same $10,000, it would only grow to around $76,000 by age 60.
Key Investing Concepts for Kids to Learn
To help kids understand and appreciate the world of investing, it's essential to introduce them to a few key concepts:
Compound interest: As mentioned earlier, compound interest is the process of earning interest on both the principal (initial investment) and accumulated interest over time. This concept is crucial for understanding how investments can grow exponentially, especially over long periods.
Diversification: Diversification is the practice of spreading investments across different asset classes (such as stocks, bonds, and real estate) and sectors (like technology, healthcare, and energy) to reduce overall risk. By not putting all their eggs in one basket, investors can minimize the impact of any single investment performing poorly.
Risk vs. reward: In general, investments with higher potential returns also come with higher risks, while lower-risk investments offer more stability but lower returns. It's important for kids to understand this trade-off and learn how to balance risk and reward based on their goals and risk tolerance.
Long-term thinking: Successful investing requires a long-term mindset. Rather than focusing on short-term fluctuations in the market, kids should learn to evaluate an investment's performance over years or even decades. This perspective can help them weather market volatility and avoid making impulsive decisions based on fear or greed.
Age-Appropriate Ways to Teach Investing Concepts
Teaching investing concepts to kids should be tailored to their age and maturity level. Here are some ideas for introducing these concepts at different stages:
Elementary School (Ages 5-10)
Use piggy banks or jars to teach the basics of saving and goal-setting
Play simple board games that involve money management, like Monopoly Junior or The Game of Life Junior
Read age-appropriate books about money and investing, such as "The Berenstain Bears' Dollars and Sense" or "Rock, Brock, and the Savings Shock"
Middle School (Ages 11-13)
Encourage kids to start tracking stocks or mutual funds and discuss their performance
Help them open a savings account and explain how interest works
Introduce the concept of budgeting and have them create a simple budget for their allowance or earnings
High School (Ages 14-18)
Offer to match a portion of their investment contributions to incentivize saving and investing
Help them open a custodial brokerage account and let them choose some investments with guidance
Encourage them to participate in a stock market simulation game or join an investing club at school
Age Appropriate Investing Teaching Methods for Parents
By understanding these foundational investing concepts and learning about them in age-appropriate ways, kids can develop a solid base of financial knowledge that will serve them well throughout their lives. In the next section, we'll explore how to maximize the educational value of investing for kids and help them build strong financial habits for the future.
Maximizing the Educational Value of Investing for Kids
Teach kids about investing through real-world examples and everyday life lessons
Encourage financial literacy by helping kids set goals, budget, and make informed decisions
Engage kids in hands-on learning experiences to deepen their understanding of investing concepts
Incorporating Investing Lessons into Everyday Life
One of the most effective ways to teach kids about investing is by connecting it to their daily experiences. Many companies behind familiar products and services, such as Apple, McDonald's, or Disney, issue stocks. Explain to your children that when you invest in a company, you become a part-owner of that business. This concept can be illustrated using real-world examples they can relate to.
For instance, if your child enjoys playing with Lego sets, you can explain that by investing in Lego's stock, they would own a small piece of the company that makes their favorite toys. This helps them understand the connection between the products they use and the companies behind them.
Using Real-World Examples to Illustrate Investment Concepts
Introduce basic investment concepts like supply and demand, market trends, and economic cycles using examples from your child's everyday life. As an example, if your child collects trading cards, you can discuss how the value of certain cards fluctuates based on their rarity and popularity. This can help them grasp the idea of market demand and its impact on prices.
Similarly, you can use examples from current events to explain economic cycles. If a major company announces layoffs or a new product launch, discuss how these events might affect the company's stock price and the overall market.
Encouraging Financial Literacy and Responsibility
Teaching kids about investing goes hand in hand with promoting overall financial literacy and responsibility. Help your children set financial goals and create a budget for their allowance or earnings. Encourage them to allocate their money into different categories, such as saving, spending, donating, and investing.
Discuss the importance of researching investments and making informed decisions. Teach them how to read basic financial statements and understand key metrics like revenue, profits, and growth rates. Emphasize the value of patience and sticking to a long-term investment plan, even during market fluctuations.
Helping Kids Set Financial Goals and Create a Budget
Sit down with your children and help them identify short-term and long-term financial goals. These might include saving for a new toy, a summer camp, or even a college fund. Assist them in creating a budget that allocates their money towards these goals while also setting aside funds for investing.
Use visuals like charts or graphs to help them track their progress and understand how their investments can grow over time. Celebrate milestones along the way to keep them motivated and engaged in the process.
Engaging Kids in Hands-On Learning Experiences
To deepen your children's understanding of investing, provide them with hands-on learning experiences. One way to do this is by participating in stock market simulation games or virtual trading platforms designed for kids. These tools allow them to practice investing with virtual money, learn from their mistakes, and develop a better understanding of how the market works.
Another hands-on approach is to involve your kids in your own investment decisions. Share your research process with them, discuss the pros and cons of different investment options, and explain your reasoning behind each decision. Encourage them to ask questions and offer their own insights.
Participating in Investment Clubs or Workshops
Consider enrolling your children in investment clubs or workshops tailored to their age group. These programs often combine education with fun activities, making it easier for kids to grasp complex financial concepts. They also provide a platform for children to interact with their peers who share similar interests, fostering a sense of community and collaboration.
Look for investment clubs or workshops in your area that cater to children and teenagers. Some resources to explore include:
BizKid$, a national financial education program for kids
Warren Buffett's Secret Millionaires Club, an animated series that teaches financial lessons
Local community centers, libraries, or schools that may offer financial literacy programs for kids
By incorporating these strategies, you can create a comprehensive and engaging learning experience that helps your children develop a strong foundation in investing and financial responsibility. Remember to tailor your approach to your child's age, interests, and learning style, and be patient as they navigate this new world of financial education.
Balancing Investing with Other Financial Priorities for Kids
Teach kids to allocate money wisely between investing, saving, and giving
Help them set financial goals and create separate accounts for each purpose
Encourage a balanced approach to money management from an early age
Building an Emergency Fund
Before diving into investing, it's crucial to teach kids the importance of having an emergency fund. This safety net helps protect them from unexpected expenses or financial setbacks, providing a sense of security and stability.
Aim to help your child save at least 3-6 months' worth of living expenses in a separate savings account. This may include a portion of their allowance, gift money, or earnings from odd jobs. Discuss with them the importance of having liquid savings that can be easily accessed in case of an emergency, such as a car repair or medical bill.
Tips for Building an Emergency Fund
Set a clear savings goal together and break it down into manageable monthly contributions
Consider opening a high-yield savings account to maximize interest earned
Regularly review the account balance together and celebrate milestones along the way
Saving for Short-Term Goals
In addition to long-term investing, encourage your kids to save for short-term goals they care about. This could be a new bike, a special trip, or a gaming console they've been eyeing.
Help them identify these near-term financial goals and create a separate savings account for each one. Together, determine how much money needs to be saved and by when, then break it down into weekly or monthly targets. Regularly track progress together, discussing the trade-offs between spending money now versus saving for larger purchases later.
Ideas for Short-Term Savings Goals
A new musical instrument or sports equipment
Tickets to a concert or sporting event
A summer camp or educational program
A special gift for a friend or family member
Donating to Causes They Care About
Encouraging charitable giving from a young age helps kids develop empathy, social responsibility, and a sense of purpose. Discuss the importance of allocating a portion of their money to causes they care about, whether it's a local animal shelter, a children's hospital, or a global humanitarian organization.
Help your child research and choose reputable organizations that align with their values and interests. Together, explore the different ways they can give back, such as one-time donations, recurring contributions, or even volunteering their time.
Benefits of Charitable Giving for Kids
Fosters a sense of gratitude and perspective
Develops leadership and decision-making skills
Strengthens connections to the community and the world around them
Provides valuable tax deductions for their future finances
Case Study: Balancing Financial Priorities
One practical example of a child successfully balancing financial priorities involves setting up savings funds together and allowing kids to manage their money, including making mistakes. This approach teaches them the realities of wealth management. For instance, if a child wants to buy a toy that they later regret, discussing this decision helps them understand impulse spending and better financial planning for the future.
Matching your child’s contributions can be a powerful incentive, encouraging them to save more. Moreover, involving them in setting up various savings vehicles such as 529 Plans for education and custodial accounts for broader investments can provide a structured approach to saving and investing.
So, what should a kid do with $1,000? By following these guidelines, they can allocate a portion to their emergency fund, set aside some for short-term savings goals, donate to a meaningful cause, and still have funds left over to invest wisely for the future. The key is finding a balance that aligns with their values, goals, and financial situation.
Empowering Your Child's Financial Future
Investing for your child's future is one of the most powerful gifts you can give. By starting early and involving them in the process, you help set the foundation for a lifetime of financial success.
Custodial accounts, 529 plans, and other investment vehicles offer great options to grow your child's wealth over time. Teaching them about investing through hands-on experience, like involving them in family investment decisions or encouraging them to invest a portion of their allowance, helps build valuable skills and knowledge.
As you explore investment gifts and kid-friendly apps, remember to focus on the educational value as well. Incorporate investing lessons into everyday life, encourage financial literacy, and help your child balance investing with other financial priorities like building an emergency fund and saving for short-term goals.
What's one step you can take today to start investing in your child's future? Whether it's opening a custodial account, discussing your own investments with them, or helping them set financial goals, every action counts. By empowering your child with the tools and knowledge to invest wisely, you're giving them a gift that will keep on growing for years to come.