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- My kids have savings accounts where they earn 1% interest, but I wanted their money to get a better return.
- I decided to open an investment account with some of their money so that they can take advantage of market growth in the 10 to 15 years before they need the cash.
- Still, I left about one-quarter of their savings in a savings account, where it will be safer and more easily accessible if they need it.
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When I was in fifth grade, my school paired up with a local bank to teach students about financial literacy. One of the big lessons was the power of compound interest. The bank handed us a sheet, showing how much money you would make through compounding if you started saving $5 a week at a young age.
"Why hadn't my parents done this?" I wondered. But, they hadn't, and they didn't start then. They were too busy raising four kids with little money.
When I had my own kids, that sheet stuck with me. Now, compound interest calculators are available online, and they're just as striking. The potential for money to grow over time is really breathtaking if you're a disciplined saver.
I'm committed to saving for my kids' future
Like my parents, I also don't have my own financial situation figured out. I'm making great progress to break the poverty cycle, but I still struggle with student loan payments and I know I should be saving more for retirement.
However, I was determined not to let that stand in the way of saving for my kids, who are now nearly 6 and 2.
About two years ago I came across Littlefund, a saving and gifting platform that allowed me to transfer $5 a week to each of my daughters. I could also ask family members to consider contributing at birthdays and holidays. My mother committed to a recurring gift of $5 per week.
By the end of the two years, with regular contributions of $10 a week and occasional bigger gifts, each of my girls had about $1,400 in their Littlefund.
I was already impressed - I had set up the account once, and I never missed the $10 a week that's withdrawn from my checking. However, I could see how quickly it was adding up!
Making money work for them
Littlefund pays an interest rate of 1%, compounded daily. Last year, my daughters each made about $14 in interest. That isn't life-changing money, but it's a decent interest rate.
Still, I wanted their money to perform better. One day I was looking at my retirement account and realized it had grown 5%, despite me inadvertently having my money in a low-risk account. I knew that the market had an average annual return of roughly 7%, when you account for inflation. If I really wanted my girls' money to grow, I needed to invest it for them.
Of course, there are more risks with investing. In a savings account, my children would get a guaranteed return (albeit, a small one) and their money would be insured. In the market, there are no guarantees.
However, this money is essentially "extra" for my kids. It would be great if they have it to fund things like travel and cars when they're teens or young adults, but it won't be detrimental if they don't.
I decided - after talking with my husband - that the potential rewards of investing are worth the risk. Still, we only opted to invest about three quarters of their savings, while leaving one quarter in the Littlefund accounts.
Choosing an investment account
There are limited options for investing for minors. I wasn't interested in putting this money in a college-savings account. We've opted not to save for college because my children are dual citizens and can attend school in another country for much less money.
So, I turned my attention to Uniform Gift to Minors Act (UGMA) accounts. These investment accounts are opened in the name of a minor and managed by an adult. When the child becomes an adult, they take ownership of the account.
Since the account belongs to the child, earnings are taxed at a child rate, and the first $1,000 in earnings are tax free. Our initial investment was only $1,000 per child, so I wasn't too worried about the tax implications.
However, there was a drawback. Since UGMA accounts belong to the child, they can have a significant impact on financial aid. If one of my daughters ends up ignoring my advice and going to college in the US, I didn't want this savings to hurt them.
In the end, I opened a brokerage account in my name, and deposited the girls' money there. It's separate from my retirement, so I know the money is theirs (half for each of them). Any earnings will be taxed at my rate, but the account will have less of an impact on financial aid in the future.
Taking action today
I'm not positive this is the best vehicle I could have chosen to invest for my daughters. However, I do know that this was a simple, straightforward way for me to invest on their behalf.
Rather than spending weeks trying to identify the best possible option, I'm glad I took action today and got my daughters started toward taking advantage of compounding and investing early on in their lives.
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