Kid’s Financial Success
This is not my normal content, this is not related to Business Central, tax or other things I liked to talk about but wanted to give some helpful advice I had learned. These come from a lot of sources, videos, various Instagram’s, convos with friends, etc. So something may look familiar or been posted by someone else and now I’m just spitting it back out here. I am not an attorney tax or otherwise, estate planner, or someone in a position to give you legal or financial advice - i.e. don’t sue me.
If you are failing to make your own ends meet, and don’t have your life mask on - I get it. Do what you can, when you can, and if you can’t, you’re not a bad person/parent. Or if your child is making money from a job so it’s not your burden, the below will help maximize that money.
Roth IRA
First, set your kid up with a Roth IRA. There are going to be catches here, the child must have earned income. This earned income can be from a real job (W-2 kind of deal), babysitting/golf caddie, or working for you - be careful, each state has different rules on what “working for you” means or what kids of certain age can work as - my kids are models for my business.
There’s several services for Roth IRA, rules change often but you can normally put around $6,500 in this account per year. Personally, I would try to max if you can, but honestly giving anything, even $100 a month long term can make an impact. Roth IRAs are after tax, so you are not taxed on the interest on withdrawal on the age requirement.
Where to invest? For me, low fee, low transaction fees, etc would be my win. Think Fidelity, Vanguard, Schwab. For these, you can do splits they recommend for how safe, be an active trader, or just do the standard S&P 500 like a VOO.
Time value of money, or even if you look at Warren Buffet or ever read Psychology of Money (highly recommend), just leaving the money there for that long is guaranteed to have a good return; even if there’s market collapse etc. If you put $6,500 in annually from the age of 10 to 65 - they would have over $2.5M in that account at retirement. If they can’t contribute and you do this for 10 years for them - they will have ~$1M and that’s only using a 6% rate of return. Most Roth’s earn around 12% or higher and if you reinvest dividends, and they also invest annually at the full amount, they could be potentially be sitting on $20M-$100M at retirement.
I.e. 10-18 years of this at a young age, even on a lower return will make it so your kids will have enough to retire.
Please note: laws change a lot around retirement plans, college are trying to get access to these to help pay for college. You know, verse the logical thing college’s should be doing: making college affordable. Which could mean these could count against your kids for financial aid, however, still worth it.
529 Plan
No hate on me for this one, 529 plans can now roll into a Roth account if that Roth has been opened for over 5 years. Which we just established; otherwise, honestly I wouldn’t be a fan.
First, this is ear marked money, it normally comes with tax benefits, and can roll to other children as well if your child doesn’t use it.
The return on these is also tax free, and can yeild around 13% return.
One tip I heard recently from my friend Nash, it might be better if a grandparent opens and is the custodian of these accounts verse the parent. That way if you don’t have enough to pay for college, they can apply for aid and this won’t count against them.
If you do take this in your name, and open in your state there could be tax benefits, but you can also get these from other states that have lower fees like NY’s. At least with these, I found my states tax benefits + interest out weighed the fees.
I don’t put much into this account, around $100 a month - which is probably only one year of college but a good vehicle to save money.
Hot Tip: If you open this the year your child is born, there are some states/accounts that offer a “first steps” program; that matches up to $5,000 that’s put into the account in the first 5 years. Check out College Invest.
Custodial Brokerage Account
There’s two ways I could go here, a High Yield Savings account like BMO (which at current is around a 5% interest), or do a Custodial Brokerage account. What does this get you? Life money. Weddings, first house, cars, etc.
Once again, if this is something you put a small amount into, and not day trading, just letting this sit in an S&P 500; this account has a super high earning potential. It will role to them when their 18; and you do need to pay taxes for earnings. However, how did Warren Buffet make so much? He’s old and he started investing when he was young. Per Psychology of Money don’t panic if the market is low, or go crazy selling when it’s high - you most likely will make the best returns by doing nothing. There is a difference when you invest at the right time, verse at the very wrong time; but they have found that the spread between right, normal, wrong time all still return much higher than someone who did nothing - so don’t wait for an economic recession or that you think the market will pull back. Mostly because you and the experts have no clue when there will be a recession or a market pullback. Also doom makes the news, not the market will continue on doing the thing it does.
If you go the High Yield Savings route, still a great return; lower risk, easier liquidity to the money. The important part is to save money and have that money make money. I’d even go as far as to say a CD or even a T-Bill is better than money sitting in a regular bank account.
Credit History
If you have a good credit history, and pay your credit cards on time - you can add your kids to your cards as authorized users. There are catches so please be sure with your credit card what age and if they report to the credit agency. If they don’t report this won’t do much. At the age of 13 or so you can normally get them their own credit cards. Long credit history that’s good = High credit score. Plus, the child will take your history on; so if that card has 30 years credit history, your 10 year old now has 30 years credit history.
Life will be cheaper if they have a good credit score. Plus you can help them learn good credit habits, though, I don’t recommend you hand your Visa card with their name on it to your kids.
However, if you do this, you also can be the parent that trashes your kids credit. So please do not add them if you have terrible credit. Also don’t get them a card you so you can use and not pay the bill leaving them with debit they most likely don’t even know about. While not setting up Roth’s or other accounts for your kids doesn’t make you a bad parent, ruining your kids credit does really make you a bad parent. Zero credit is preferred to bad credit. Hopefully, if you’re reading something on how to help your kids future you are in fact wanting to be a good parent; yet I know several people whose parents ruined their credit.
Just Get Started
On most of these you actually have to fund the investment, so while I don’t think I said that each time - make sure you’re not transferring money and it be sitting in what’s called “Cash” account. Cash accounts are around 4% or less on return.
If your kid is 1 years old or 15 the important part is to get started - well maybe 15 a bit late for the 529 but the rest you can do. The best time to invest was last year (or in 2007/2008, these kids were lazy not investing when not even born), the second best time is now.