The Kolberg kids own stocks. Lots of them.
I’m cheap. I shop for clearance for my kids all year long for my boys’ birthdays, Christmas, special surprises, and so forth.
However, the most important gift I give my kids for holidays and regularly throughout the year, is the deposits I make to their investment accounts.
Yup. My kids have their own investment accounts.
Why on earth would a child need an investment account? I’m so glad you asked!
When it comes to long term investing, time is literally everything.
If you were to buy yourself a handful of shares of that one company famous for the mouse and the princesses and theme parks (I won’t mention any names), you may look at your first round of dividend payments in disgust. This is not even enough for an extra value meal, you’ll think. But what happens if you buy shares of that company for a baby?
Well, magic happens (which, coincidentally, this company is also famous for). Let’s pretend my own mother had purchased $500 worth of Disney shares for adorable, perfect, baby me right after I was born. Let’s say it was just that one purchase and then we all forgot about it for 32 years.
From May 23, 1984 until September 17, 2016, that $500, with reinvested dividends, grew to nearly $50,000.
That’s why kids need investments.
That purchase wouldn’t have taken any investment skill. It wouldn’t have required a parent to know a thing about market timing or price-to-earnings ratio or fair value or payout ratios or anything. Just, oh, I’m gonna have a baby. Kids like Disney. I’ll just get some of that. And then we could have both slipped into a coma for 30 years and had this chunk of money just waiting on us.
You shouldn’t choose your investments this way, like a game of pin the tail on the donkey. My mother (hypothetically) could have mistakenly chosen a company like Kodak or Enron, which is why investment education is still important.
My point is that with long term investing it really is not rocket science, with a bit of basic knowledge.
Of course, I was born in the infamous Flint, MI and my mom was raising me all on her own as a bartender, so she wouldn’t have had $500 to stash away in 1984 even if she had had the knowledge to make such a purchase. But what about you?
You’re reading this article. If you didn’t know investing for babies was a thing, I’m telling you it’s a thing. You can set this up for your favorite small person. Anyone can.
Maybe you don’t have $500 just laying around to stuff away for 30 years either. That’s okay! I have 3 expensive boys. I get that. You can put your kids leaps and bounds ahead of where any of us were when we became adults by just putting a little aside each paycheck for your child.
When I started investing for my children, I deposited $10 for each of them every pay period, before we even woke up on payday. I would deposit an extra $50 for each of them on Christmas and birthdays. I would throw in extra any time we had extra money from a bonus or tax return (in the good ole days when we got a tax return!)
What if my mom, instead of putting $500 towards some shares of Disney all at once, had done that, and taken $30 every other week, set it aside, and bought me some Disney shares once a year? Let’s say she added another $50 for birthdays and Christmas, and had the dividends reinvested the way I do.
What if I did the same small amount when I started earning my own money? Guess how much money I’d have at age 32?
A huge amount of money can be created, just from a little bit of the money you’re probably spending on your child anyway (I mean, my mom wasn’t spending that on me, because like me, she’s sickeningly cheap, but you might be nicer).
I’d be earning $5,030.97 every year in dividends from that $15 a week and some special occasion money.
Even if Disney slows it’s roll and only returns the 100 year average of large cap publicly traded US companies, down to a 10% return annually, if I continued contributing that same amount myself, I would:
Be a millionaire at 43.
Have $4.8 million at age 60.
Have $7.8 million by 65.
And then after that, we’re just getting silly. The bottom line is that by that (hypothetical) point I’m very wealthy…because of $15 a week and some change.
Herein lies the problem with the way most of us live:
We are not lacking money.
We are lacking financial education.
This small bit of money invested early and consistently will change your child’s entire life. Can you imagine if you had $150,000 and a bit of knowledge about how investing worked at age 25?
Having this kind of money will open doors that will otherwise be closed and allow your child to maximize whatever gifts he or she has been given.
I want to point out that this is the real, actual performance of Disney over 32 years (courtesy of the handy calculator at dqydj). Even with the financial crises of 2008, 2000, etc, this company still blew the S&P 500 return of 11% out of the water at over 15% annually.
Long term quality investing is beautiful this way: you just hang on tight and sail through the storm. Strong companies like Disney and many others will likely not be taken down by them. You’re only guaranteed to lose when you panic and sell at the bottom.
Considerations Before Opening A Custodial Investment Account
This account is not a college account, and that’s why I chose it for my kids. They CAN use it for college, but they’ll also be able to use this money for living expenses during college, to travel or attend school abroad, for a down payment on a home, to start a business, for rental properties, or anything else they want.
They can retire early with this custodial investment account with no penalty, unlike with traditional retirement accounts.
This money that you put away in this account now belongs to your child. You can’t use this as a personal piggy bank. Anything you withdraw from it must be used to benefit your child. That’s really a rule, not just me being bossy.
This account is controlled by you only until age 18 or 21, then it is your child’s account. This could be good or bad, depending on what you teach your child about this money. Check to see what the age of majority is in your state.
This account will be considered a child asset for financial aid applications. This is important to consider if you plan to rely solely on financial aid for funding your child’s higher education.
A custodial investment account is not a tax-advantaged account like a 401k or IRA. However, if you’re putting small amounts of money into it, the earnings will probably not be taxed. Once you reach $1050 in earnings (as of 2016), the money is taxed at your child’s rate (which may be low if he/she has no other income). But once you hit $2100 per year in earnings, that income is taxable for your child at your highest marginal rate.
Sounds confusing, but for example: your child would need to own $137k worth of Disney in order to generate enough in dividends to be in that high parental marginal rate tax bracket, so it isn’t usually an issue for most of us. Learn more about the kiddie tax here.
If you want the tax benefits associated specifically with saving for college, I recommend a Coverdell ESA (for which I also recommend this same brokerage, and you can open using the same steps in this tutorial), and/or a 529 plan.
The point of this account is not to pay for kids’ college. There are better vehicles for that.
The goal for this particular type of account is to give them a head start on building lifelong passive income and wealth, and a real sense of the power of investing early and compounding returns.
Step 1: Get your retirement right.
Before anything else.
Retirement must always come before saving for your kids. Your kids have plenty of time to make money and compound it, but your retirement is rolling up on you quick.
81% of Americans are barreling towards a diet of cat food in retirement, and there are no loans to fund it if you fall short. Part of setting your child up for financial success is making sure you don’t become a financial burden on them in your old age.
Bottom Up Wealth offers a course called Retire Wealthy, all about the basics of investment, offered by invitation only.
Step 2: Determine your goals and which investment account types help you achieve them.
To buy stocks, you need an investment account, not a bank account. As I mentioned above, depending on your situation, you want to be cautious about assets held in their name for financial aid purposes, and if you’re investing for college, there are more tax efficient vehicles over a custodial investment account.
Step 3: Set a comfortable amount to invest for your child on autopilot.
No matter what type of investment account you choose for your child, consistency in your deposits is key.
It can be $5, $20, $50 dollars a week or per pay period, but automation is a major component of success, for both your investments and your children’s. Of course, this should be done after you do so with your own IRA!
Step 4: Educate yourself.
The best gift you can give your kids is future financial stability…that starts with educating yourself! Children become what they’re exposed to, and your habits will become theirs. Start your wealth education with the free 7 Streams of Income course from Bottom Up Wealth.
Step 5: Buy your child profitable and quality companies.
There’s a risky way to buy stocks, and then there’s a safer, intelligent way. Then leave them alone and watch them create money out of thin air! I show you exactly what to look for in Zero to Investor, the stock investing course for beginners.
Step 6: Teach your child about money.
It goes without saying that if you give a 21 year old tens of thousands of dollars with no education as to how it got there and what to do with it, chances are it will be squandered quickly and waste years of careful wealth building. Read a recent conversation I had with my own 10 year old about his investments.
Once you have the knowledge and tools learned in Retire Wealthy and Zero to Investor, you can create wealth for generations for your family!
Follow these guidelines, and your child is set on the right track to have an amazing future, full of possibilities. If this account is properly cared for, your child will start adulthood miles ahead of his or her peers. They will be free to pursue their passion without being inhibited by a lack of funds.