If you have children, you may need to bear their financial responsibilities either fully or partially. However, there will come a day when they will step into society and manage their finances on their own. This might be a daunting task for them, especially since they cannot open their own credit card account before turning 18, limiting their exposure to financial planning before adulthood.
But with your guidance, your children still have the opportunity to explore various financial accounts that can help them better understand budgeting, saving, investing, and even prepare for college. Let’s delve deeper into these options.
Your children may earn some income through part-time jobs or allowance. Instead of just keeping the cash they earn in a piggy bank, it’s advisable to deposit it in a secure place like a checking account insured by the Federal Deposit Insurance Corporation (FDIC).
If your child is under 18, you can open a joint checking account for them, allowing both you and your child to use the account. However, consider letting your child take control of the account to better track their expenses and learn how to budget effectively.
Choosing where to open the account is crucial. Compare different options to find the best fit for your needs. The ideal checking account should have no maintenance fees or minimum balance requirements, and some even offer interest earnings.
Additionally, look for account features like parental controls, which can include spending limits to prevent children from exceeding a certain amount when making withdrawals or payments. This not only helps them develop more financial discipline but also teaches them to keep their expenses within budget.
Developing good savings habits should start early. If your child is under 18, consider opening a joint savings account for them.
However, when selecting a savings account, it’s essential to compare various options. Not all savings accounts are the same, especially concerning interest rates and annual percentage yield (APY).
According to FDIC data, the average APY for savings accounts is 0.39%. You can find high-yield savings accounts at online banks that offer APYs ranging from nearly 5% to 10% for significant deposits.
Having a high-APY savings account for children can help them understand the power of compound interest from a young age and instill the concept of long-term savings.
You can also consider Money Market Accounts, which typically offer higher APY than traditional savings accounts. Many of these accounts are linked to debit cards, allowing easy access to savings funds in emergencies.
However, when choosing these accounts, consider your child’s discipline. The savings should primarily be used for necessities and emergency expenses.
Long-term investing in securities like stocks and bonds is an effective way to build and maintain wealth.
You can start investing for your child’s future by opening a Custodial Brokerage Account in their name when they are born. Until your child reaches the legal age of adulthood (18 or 21, depending on the state), you will manage the account. After they come of age, they will have full control over it.
You can open such accounts through banks or brokerage firms, but compare options carefully. The best account platforms have low or no fees and offer a variety of investment options, financial instruments, and information.
If you are unfamiliar with the investment field, you can also consider opening a Custodial Brokerage Account through a robo-advisor, an automated investment advisory service.
Here’s how it works: Fill out a questionnaire about your financial situation and investment goals, and the digital platform will recommend a diversified investment portfolio based on your responses. The robo-advisor platform automatically manages this portfolio, sparing you from selecting individual stocks, ETFs, or mutual funds. In some cases, the platform adjusts the portfolio allocation automatically according to market changes.
Custodial Brokerage Accounts come in two main types, differing in the types of assets that can be invested in:
Uniform Transfers to Minors Act (UTMA) accounts allow investment in nearly all types of financial assets, from stocks to alternative investments.
Uniform Gifts to Minors Act (UGMA) accounts are limited to traditional assets like cash, stocks, and mutual funds.
However, note that UTMA accounts may not be available in all 50 states.
The cost of higher education continues to rise, but you can invest in your child’s future education by opening a 529 Education Savings Account in their name after they are born.
These savings accounts offer specific tax advantages. The earnings generated from the funds are tax-deferred and can grow tax-free as long as they are used for qualified education expenses like tuition, books, and educational supplies. Additionally, some states offer tax deductions or credits based on your savings amount.
529 plans allow you to invest in various mutual funds or age-adjusted portfolios managed by professional teams. While the funds are primarily invested in growth securities like stocks when your child is young, the asset allocation gradually shifts towards more conservative investments over time to protect accumulated savings.
Nearly every state has its own 529 Education Savings Plan, so you can open an account in any state. Even if your child doesn’t attend college in that state, they can still use the funds in the account and benefit from related incentives.
When comparing different 529 plans, pay particular attention to investment options and contribution limits.
Achieving healthy finances takes time and practice. If you have children, it’s essential to teach them financial planning early on. You can help them achieve this goal by opening various financial accounts like joint checking and savings accounts, Custodial Brokerage Accounts, and 529 Education Savings Plans.
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