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Welcome back, fellow parent

Let’s chat about investing for your kids’ future.

It’s extremely important to start as early as possible to allow compound interest to work its magic.

One piece of advice before we dive in. I don’t want you to read today’s newsletter and dump your life savings into accounts for your kids.

Compare it to when flight attendants tell you to put on your own oxygen mask before assisting the person next to you. Get your finances in order before saving for anyone else.

The best thing that you can do is lead by example for your kids, including how you manage your finances. This includes having (or creating) a budget, paying down debt, and saving for retirement.

The TL;DR

I decided to use a chart for this week’s TL;DR instead of the normal 3 bullet point list. Bet you didn’t think you’d see a chalkboard again anytime soon…

Each of the above are super simple to start, and should only take a few minutes to set up.

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#1: 529 Plans

529 plans are tax-advantaged savings accounts that allow you to grow money tax-free if the funds are used for a qualified education expense. 

Qualified expenses include tuition, supplies, and room and board. 529 plans recently expanded to include K-12 tuition and certain apprenticeship programs.

Every state sponsors a 529 plan, and you aren't limited to the state you reside in. We chose to go through the State of New York, as they offered some great investment options within their plan. 

If your kid decides to take a different path in life, you can switch beneficiaries. Roll the savings to the next kid or save it for one of the future grand babies. 

P.S. Check out this in-depth comparison chart to learn more about the 529 options available. 

#2: UGMA / UTMA

The Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are great options if you'd like to put money away for your kid that isn't tied strictly to education. 

Both custodial accounts allow you to transfer and invest financial assets to your child without a trust. 

A key difference is that the UTMA allows property to be included in the portfolio, including anything from cars to real estate. 

Two watch-outs to consider:

1. These assets legally belong to your child and when they reach adulthood (age varies by state), they can do with it what they will. New truck instead of school or starting a business? Can't stop them. 

2. According to Saving for College, these accounts can reduce financial aid eligibility by 20% of the asset value. In comparison, 529 plans are considered your asset (your child is the beneficiary) which only reduces financial aid by 5.64% of the asset value. 

Definite pros and cons to consider here. Raise your kids with strong financial values and it should all work out. 

#3: Roth IRAs

Roth IRAs are one of my personal favorite investment vehicles and I wish I opened one of these earlier because they allow you to grow your money tax-free.

Similar to other investment accounts, you can open a Roth IRA in your child's name and serve as the custodian until they reach adulthood. 

One catch, they need to have earned income to contribute. This includes anything from shredding paper to mowing lawns to bagging groceries.

This is a great way to get a head start on your child's retirement, maximizing compound interest and setting them up for their later years. 

Quick napkin math: let's say you open a Roth IRA for your child at age 10 and invest $520 per year until they're 18. They then do the same until age 65. Assuming a conservative 7% annual rate of return, investing ~$29k will turn into ~$300k! 

#4: Brokerage Accounts

Brokerage accounts are another great way to invest in your kids' future. They're extremely flexible - you can invest in stocks, bonds, mutual funds, and ETFs. One downside is that these accounts are subject to capital gains taxes.

Brokerage accounts are available through countless brokers. Some of the biggest players include Vanguard, Fidelity, and Charles Schwab to name a few. Robinhood and Cash App allow you to easily invest in fractional shares, which is great if you only have a few dollars to invest.

One product to consider if you have a teenager is Fidelity's Youth Account, available for teenagers ages 13 through 17. It comes with a debit card and allows them to invest, all with your oversight and no monthly fees. There are several young adult savings accounts out there, Fidelity stands out due to the ability to invest and minimal fees.  

#5: Savings Account

Okay, I know what some of you may be thinking, "can't I just throw some money in a traditional savings account for my kid?" The short answer is yes! You definitely can do that and I still believe it warrants being on this list. 

Savings accounts are FDIC-insured, meaning that your child's money is safe for the most part. 

If you're looking for a flexible but very conservative approach to investing money for your kids' future, this is still a good option to consider. 

Plus, interest rates are high at the moment so you should earn a pretty decent return.  The rates won’t stay high forever though, so keep a close eye on them to maximize your return over the long term.  

Historically, savings accounts don’t keep up with inflation, meaning your money is actually losing value over time as it sits in your savings account. 

Which Option is Best?

As with many financial decisions, there isn't a right or wrong answer but what works best for you and your family. 

Pick a way forward, raise your kid with good money values and the rest will fall into place. 

You're not locked into only one path and can open different accounts as your child grows. 

My wife and I have a toddler and we have both a 529 plan and UGMA. As she gets older and my business grows, I plan on hiring her and opening a Roth IRA in her name. 

My goal is to give my little one a leg up, but that doesn't mean paying for everything. You want your children to "buy in" to their future and still put in the work - just with a bit of help along the way. 

I’d Love to Hear from You

How are you investing for your family?

Hit reply, I’d love to hear more.

Money News 🤑

1. Hawaii vs. Short-Term Rentals: If the new law passes, short term rentals such as Airbnb will no longer be allowed to exist starting in January 2025. Well, okay, technically they’d be able to exist after the law passes but would be hit with a $10,000 fine PER DAY. Short term rental owners will either need to sell their property or convert them into long term rentals. The hope is that this will help locals find affordable housing.

2. Death to the Noncompete: Did you know that roughly 1 in 5 Americans are working under a noncompete? Noncompetes are essentially a legal contract which prevents you from working for your current employer’s competitors, customers, and sometimes industry for a specific period of time (usually 12 months). This favors the employer, as we all know it isn’t easy to switch fields or find work outside of your category. Well the FTC stepped in and has passed a nationwide law which should take effect later this year. Being someone who has been under more than one non-compete, they are cumbersome and I’m excited for this change. If you’re worried about the corporations, don’t fret. Corporations can still lock down their secrets with Non-disclosure Agreements (NDAs).

3. FTX 118% Payout: Remember back in 2022 when FTX, the cryptocurrency exchange, went bankrupt and lost over $8 million overnight? Well, in a turn of events, the bankruptcy court is looking to pay back customers 118% of what they lost. This is pretty rare as you typically you don’t see your money back during a bankruptcy. Thankfully the court has been able to recoup the money by selling off the remaining FTX assets to return money to their customers, plus interest.

Thank You for Reading

Thanks again for reading. I’m grateful to be part of your financial journey.

Talk soon,

The Dollar Dad

P.S. If you’re considering starting a newsletter or blog this year, I’d highly recommend Beehiiv (use my link for 20% off any paid plan for 3 months). Drop me a note if you need help getting started or growing your business.

P.S.S. As a heads up, the above link for Beehiiv is an affiliate link. If you make a purchase using the above link, I’ll receive a commission at no extra cost to you.