Every parent wants their children to be set financially. A good way to ensure they understand the importance of saving and investing is to lead by example. Not only will this help provide for their future, but it will also teach them how to be financially responsible, a valuable life lesson too many didn’t learn.
There are a variety of savvy investments for children. Some are set up so that the parents can contribute, while others involve the child and teach them about investing in their future. Here are some of the best ways to invest in the future of your children and teach them how to be financially literate.
Smart Investments for Your Children
- Build Their Credit – A good credit score can go a long way. Building your child’s credit at a young age allows them to have a head start to their financial freedom. An easy way to do this is to add them as an authorized user on one of your credit cards. Whether you actually give them a card or not, they still reap the benefits with the credit bureau.
- Brokerage Accounts – A popular investment for kids is a brokerage account that allows your child to invest in a variety of different types of securities including stocks, bonds, and mutual funds. These accounts have amazing tax advantages along with very few restrictions.
- Life Insurance – A life insurance policy is a great way to provide financial security for your children. Having a policy on yourself as well as the children is the best way to approach this type of insurance. Whole life policies are the best choice for kids versus term life, so that they can continue the coverage throughout their lifetime as long as premiums are paid – and without a price increase.
- Trust Fund – You don’t have to be rich for your kid to have a trust fund! This type of investment option allows you to give money and/or assets to your child as you wish to invest in their future. Anything from stocks and bonds to real estate and cash can be distributed via a trust fund. You choose how much and when the money is received by your child. This account does have various fees. However, it is difficult to challenge in probate court and does not have as many tax implications, making it a savvy investment for those who want certainty.
- Custodial IRA – Since children under the age of 18 are not legally allowed to open an IRA account, parents can do so via a custodial IRA for them. The options include both traditional and Roth IRA accounts. The two are almost identical, except for when you actually pay taxes on the contributions to the account. A traditional IRA is tax-deductible, which allows them to reduce taxable income, just like adults. With a Roth IRA, tax-free withdrawals are allowed upon retirement and early withdraws include a penalty of 10%.
Talking to a financial advisor about the best way to give your child a stable financial future is a smart idea. Doing so now will provide a variety of opportunities while teaching them important financial skills that will lead to great investment strategies when they are adults.