Every parent knows how fast time flies when you have children. Years go by so quickly that before you realize it, your kids have graduated college and are on their way to have their children.
It’s both an enjoyable and exhausting time in life. To support your kids, you might need to work long hours or two jobs. If you have more than one child, it can get doubly tiring. You could be working well into your 60s to put your kids through college.
So what can you do to make things easier?
You could prepare your child for college and life by finding a good investment plan for them. By saving money early and consistently, you can build up a decent amount of funds that will help your family avoid debt.
In this article, we’ll show you how you can make the right investments for your child’s future. Our team at Aspiration are big fans of financial planning, and we’re here to help you and your children achieve financial stability.
Why is it important to invest in my child’s future?
It’s important to invest in your child’s future so that they don’t accrue debt at a young age.
With the way the economy is going, college tuition fees, mortgages, and other major life expenses will likely get more expensive. Inflation, plus other factors like stagnant wages, will make paying off any major debt difficult and time-consuming.
Take college tuition, for example. The average cost of going to college is around $200,000 at the moment for four years of tuition fees, board, food, and other expenses. By the time your children attend college in 10 or 15 years, that number is expected to rise.
Your kids could take out student loans to pay for those fees. But high interest rates, and more than $200,000 of debt, are rarely great for young adult life satisfaction. It’ll take your kids years, if not decades, to pay back the debt.
Similarly, house prices are expected to skyrocket in the future. Without adequate savings, your children might not be able to buy a home like older generations were able to. They might have to put off settling down until later in life when they’ve saved up enough money.
Your children might also be reluctant to save up for other important life purchases like retirement plans and vacations if they were in debt at a young age.
Setting up an investment plan for your children early can help prevent all of these scenarios. A college plan and a savings fund can help all of your family members maintain financial stability through periods of transition. It’ll also help take the pressure off your children to care for you when you get older.
How do I invest money for my child’s future?
To begin investing money in your child’s future, identify what your main purpose for saving is.
Are you saving so that your child can attend college without debt? Do you want to save up so your child can buy a house or an apartment 20 years down the line? Or are you looking to open a savings account for them so they can learn the basics of saving?
It’s also important to know how much you want to have saved up for your child by a specific date. Some parents may want to have at least $50,000 in savings for their child to attend college without having to take out loans.
Knowing what you’re saving for and having a specific savings target will help you select the best investment plan for your child. The key with any long-term investment is to save consistently for as long as possible so that compound interest can help you grow your money exponentially.
If education is your focus, you can look into an Education Savings Account. Also known as an ESA or a Coverdell Savings Account, this tax-deferred trust account allows you to make annual contributions toward your child’s college fund.
You can invest $2,000 a year in an ESA, which means that the sooner you start contributing the more money there will be in the fund when your child turns 18.
Alternatively, you could invest in a tax-advantaged 529 qualified tuition plan. It’s a savings plan that allows beneficiaries to withdraw up to $10,000 per tuition year for any private, public, or religious secondary and elementary school.
Some parents might want to go as far as helping their children save up for retirement. Custodial IRAs are available once your child gets their first income, which could be something as small as a wage for doing household chores. The money that’s saved up in this fund can also be used to pay for tuition or make a down payment on a house.
Then there’s the good old reliable savings account. You could open a high-yield savings account with your child and teach them how to make regular savings deposits. They can watch the money grow with interest, and you’ll have taught them a skill for life.
What is the best investment account for a child?
There’s no denying that in the future, education will still be as important as it is today.
To get an office job, applicants may need to have a bachelor’s degree, at least, or an equivalent skills qualification. Job competition may become more fierce, especially more so if new jobs become scarce in the future.
To help prepare your child for this eventuality, an investment in your child’s education is a good idea.
A 529 savings account is a popular option among parents who want to slowly save up for their children’s education expenses. Most states have their own 529 plan that you as a parent can open directly.
The money in a 529 savings account can be used to pay for a wide range of educational expenses, from K-12 education to college expenses to apprenticeship costs. It can even be used to pay off student loans.
Parents can open a 529 account anytime for their child. Unlike custodial plans, the owner of a 529 account controls it, not the child. The child only gains control of the account after they reach the age of 18.
Which kind of investment plan is best for a child?
Building the right investment plan for your child requires careful consideration of the following factors: the final goal for your child and the amount of risk you’re comfortable with.
Ideally, you’d want a plan that helps both you and your child achieve financial stability. Your child should feel comfortable enough with the plan that they’re still motivated to work on their future.
An investment plan that allows room for your child to grow is a good start. This plan could be a combination of a savings account and an educational savings plan. Your child will graduate from college with little to no debt and have enough money to start their own professional life.
Both accounts can be opened for your child at a young age. You could open a 529 plan for your child’s primary and elementary education before they’re even 1. If you invest $1,000 a month into this account for your child from the age of 1, you would have $60,000 in the account by the time they reach 6.
With education sorted, you can move on to open a custodial savings account with your child. This account will help your child learn the basics of saving and compound interest. It’ll also allow them to think long-term about their financial goals.
You could alternatively open a high-yield savings account with a community neobank like Aspiration. We offer up to 1.00% APY on savings deposits that you could leverage to save up for your child’s future life purchases, like a car. When the time is right, you can simply withdraw the money for your child.
Balancing ethical investments with ones that build your child’s financial future
You may also be interested in investing in ethical mutual funds for your child’s financial future.
These mutual funds work the same way as traditional stock market mutual funds do. Their stock portfolios are carefully handpicked by financial experts to help investors get the most return on their investments.
The only difference between ethical investments and their conventional counterparts is the social responsibility factor. Ethical mutual funds cost a bit more than normal mutual funds because of the extra due diligence work that has to be done to confirm the companies’ adherence to sustainability principles.
Aspiration offers ethical investments through our Redwood mutual fund. The companies in our portfolio do not have any affiliation with fossil fuels, weapons, tobacco, or private prisons. We only invest in sustainable companies that have verified social responsibility goals, high profitability, and talented executives.
Aspiration’s Redwood mutual fund is a top choice if you’re looking for ethical investment options to save up for your child’s future. As of December 2020, our mutual fund has investments in 41 different holdings and almost $115.10 million in assets.