Investing can do wonders if you have time and patience on your side. I’ve seen this firsthand with investing for my kids over the past decade.
As new parents, my wife and I heard over and over that the earlier you start investing, the better off you’ll be. And since we wanted the best for our kids, we started from the moment they were born.
Looking back 10 years later, I’m so glad we did. Here are 5 lessons I’ve learned from investing for our kids over the last decade.
Lump Sum Investing Works
As soon as we got our kids’ social security numbers, we plunked down a big chunk of money for their future college expenses. We went with a 529 College Savings Plan as we felt that was the best solution for our family.
We contributed $10,000 for my daughter’s college fund (in 2012) and $5,000 for my son’s college fund (in 2014). The difference in the contribution amount was due to us having more available liquid cash when my daughter was born.
Given the difference, we tried to catch up so the accounts would become more even over the years. That extra $5,000 and the two years of additional compound growth in the market has made that very difficult.
After years of growth, our daughter’s 529 account now sits at around $50,000 (with 7 years until college time) and our son’s account is around $33,000 with (with 9 years until college time).
By contributing a large amount in the beginning, we took advantage of some incredible market growth over the past decade. We continue to contribute monthly, but those initial contributions really got the ball rolling for us.
Automation Makes it Easy
After our initial lump sum deposits, automated contributions supported our kids’ account growth each month. We’ve budgeted a comfortable amount, set up recurring contributions and simply leave them alone.
As our income increased (or decreased) over the years, we would adjust our contributions accordingly.
While we loved investing for our kids’ future, we also wanted to make sure our future was taken care of first. We didn’t want to end up living in their basement in our retirement years.
We took advantage of our workplace 401ks, Roth IRAs and even Health Savings Accounts (HSA) for our comfortable future retirement.
By setting up automation to work for our kids’ future as well as our future, we ensured we’d hit both these family goals eventually.
Invest with Purpose
With the college funds building up steam and our retirement funds doing the same, I started thinking about other ways I could invest for my kids’ future. After all, if investing early works well for their future college expenses, why not other important future goals?
Home Down Payment
Starting with a generous $1,000 gift from their late-grandmother, I decided to start a UTMA brokerage account for both of my kids. These accounts are only a few years old at this point, but they are doing well.
Both accounts have a bit over $2,000 total and could eventually serve as a home down payment fund in their mid 20s or early 30s. Hopefully with additional contributions, time and patience, it’ll help them each get a healthy down payment and avoid some of the stress that can come with first time homeownership.
Retirement
As the owner of a small family business, I have the opportunity to involve my kids in my work. They work as podcast co-hosts, photography talent and even help me by shooting videos.
With this support, I’ve been able to pay them a fair wage and I get to spend time with them doing work I love. This idea of family work-life integration is something that has been fun to explore lately.
The Custodial Roth IRA has been an excellent way for us to help our kids use their earned income from our time together to save for their retirement needs. This way I get to work with my kids and help them create a comfortable future.
Both of my kids have around $3,500 put away for retirement already!
Compound Interest is Awesome
These three investing goals (college, future home and retirement) are many years or decades away. The longer we have until we actually need the money, the more compound interest can work its magic.
To demonstrate this magic, let’s use a compound interest calculator to give an educated estimate of where my kids’ accounts might end up. To keep the math simple, I’ll assume $100 monthly contributions going forward, a conservative 7% real rate of return and use rounded numbers.
- Daughter’s College (Target Date of 2030): $91,000
- Son’s College (Target Date of 2032): $75,000
- Daughter’s Home Down Payment (Target Date of 2040): $43,000
- Son’s Home Down Payment (Target Date of 2042): $52,000
- Daughter’s Retirement (Target Date of 2072): $479,000
- Son’s Retirement (Target Date of 2074): $551,000
It’s amazing what compound interest can do over time if we automate contributions, stay patient and stay consistent.
It’s Important to Show Them the Way
With all three investing goals, I believe my kids will need even more money to make them a reality. But as parents, we can only take our kids so far.
There comes a point in time when we need to let them take the reins. And that’s why we’ve been having micro-conversations with our daughter and son about smart spending, saving, giving and investing.
Conversations like:
- Smart Spending: The price of groceries at the store and why we decide to not buy something that doesn’t fit with our plan
- Saving: How we’re saving for our next family vacation
- Giving: Why it’s important to give to your family, friends and neighbors in need
- Investing: How investing helps you hit really big goals
We’re hoping that these conversations will help our children understand the importance of being intentional with their money. Over time, through trial and error, we feel confident they’ll get there.
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