The potential investor needs to ask a number of questions before they begin an investment plan for a young child.
Starting investing for a child in his or her early years is one of the best gifts that a person can give. Not only does it provide for useful cash for the child’s future, it creates the opportunity to educate the child on one of the most important things in their life…money.
There are some basic rules that the person interested in investing for a child has to learn and remember. These “rules” aren’t just for investing for a child; they are for any type of investing. When dealing with any type of investing you need a plan. The plan doesn’t have to be elaborate, but it must be based on consistency, and a definite set of goals.
The potential investor needs to ask themselves a number of questions before they begin an investment plan for a young child.
- What is my goal?
- What is the long-range purpose of your plan? Reward for Attaining Adulthood, College Tuition, a Wedding Gift, or just to provide a sum of money? Do you have a specific sum in mind?
- How much can I set aside on a regular basis?
- Do you have the ability to set aside sufficient time and money reach your goals?
- Do you have sufficient knowledge of investment choices?
If not, how do I find out what options are available.
Once you establish your goal for your child’s investment, there are some basic rules that you need to be aware to help you be successful. While there are no guarantees, following these rules will enhance the potential of success of your child’s investment plan. Some of the important rules of investing are:
Pay Yourself First!
This is true for a plan for starting an investment plan for a child and any one else. Consider your investments as a bill that you place on top of your priority list. Over your lifetime a fortune will pass through your hands a little at a time with every payday. Even a minimum wage job will create a large sum over the course of 20 years. If you were to keep a small percentage of every paycheck, you would accumulate a considerable sum. This leads to another key rule.
Save and Forget It!
If you are going to accumulate savings as a start for investing you should be able to forget about the money once you put it away. If you have to go back into your savings for “emergencies” frequently, then you are not going to be able to ever accumulate enough savings to ever make investing worthwhile. Investment money is meant to be used to make more money. Once it is spent it is no longer an investment.
By setting aside a sum every period (day, week, or month) that you can maintain over the long run, you assure a sure and steady grow of funds as a base for investment. Your plan for the child must include a system for consistently investing a sum of money on a regular basis. Whether its $1 a day or $1,000 a month, the key is to be able to set aside that amount of money consistently over the course of a number of years. To be successful as an investor you must make saving a habit. The more habitual it becomes the easier it is to have the funds you need to invest.
Develop a Savings System that is Automatic!
When possible the money for the child’s investment plan should be withdrawn in a way that requires no action on the part of the investor. Direct Deposit, Payroll Deduction, or a regularly scheduled Electronic Funds Transfer from your checking or savings account should be utilized to fund the investment plan. While it is not impossible to have an “automatic” savings plan, the use of available resources such as the ones noted makes it much easier to save or invest.
While the “rules” help provide the mechanism for saving and investment, the choice of methods, or investment vehicles requires you to understand the various options for investment and the concept of risk versus reward. While there are hundreds of investment options available to use to fund a child’s investment plan, I will limit the discussions here to those, which involve Fixed Investments and Variable Investments. This is a simplifying the list of available choices, while eliminating choices such as Insurance, Real Estate, Commodities, and Stock Options; it will try to give a brief and general description of the two most basic types of investment.
Fixed Investments are investments that give a set or “fixed” rate of return. They include bank savings accounts, federal and local government bonds, and any investment in which there is a “guarantee”. Fixed investments are generally considered safer, however this “safety” comes at a price. The price is that in exchange for the lack of risk offered by a fixed or guaranteed return, there is a much lower return on investment. Variable Investments have not set rate of return. They include stocks, corporate bonds, and mutual funds. While there is risk and no guarantees on variable investments, on average there returns have been several times higher than those of fixed investments. Thus the concept of risk versus reward comes into play.
There is historical data available on the rate of return of all types of investments, but for comparison. Over the last thirty years the average return on bank accounts is about 3% per year. Compare this to the average return on mutual funds based on stock during the same period, which is over 12%. It is important to remember that variable investments sometimes have periods of actual loss, and that there are never any guarantees.
Risk versus Reward, you have to make that choice when it comes to investing for a child, but there is also another fact to consider. Investing for a young child means time is on your side. You can also choose to mix your investments combining both fixed and variable investments. In the end you have to do some research and make your choices based on your comfort level.
Almost all companies that have investment programs allow you to utilize some form of automatic deduction or payroll withdrawal. The Internet makes it possible to find banks, mutual funds, and even buy stocks by using electronic funds transfers. They also have plans that specialize in investing for children. They have tax sheltered plans, trust accounts, Gift to Minor Accounts, that can have either fixed or variable forms of investment. You can also contact your local bankers, mutual funds salesman, or even an insurance agent to see what plans they have that fit your needs.
Investing for a child’s future is a way to provide a number of things, among them love. It is a way to involve you in the life of a child in a meaningful manner. However it is also something that requires personal responsibility.
When starting an investment plan for a young child, one important consideration is; Do you plan to include teaching the child about money and saving as part of your long-range plan? If your goal is to just provide a sum of money of a youngster at some time in the future, your approach will be much different than it would be if your long-range goal includes teaching a child to learn to handle and appreciate money. If you are thinking about setting up an investment plan for a young child, and your plan is to have a specific sum for a specific goal, such as college tuition or a wedding gift, you may choose to keep you intentions and or your investment activities to yourself. However, it seems only logical that if you are going to go through the trouble of systematically setting aside and investing money for a child’s future, you should be actively concerned with that child gaining an appreciation and understanding of money’s value. There are countless stories of young men and women, who when given a windfall of a large sum of money, proceed to recklessly spend or lose it. As a person involved enough to invest for a child’s future, it only makes sense that part of your investment should be in helping to teach the child the importance of saving, and spending responsibly. While it is not always practical, when possible you should involve the child in learning the reasons why they should save.
Note: Often the terms investment and saving are used interchangeably. For the most part this use is correct, however in this work savings usually will be used to express the accumulation of money, while investment will most often express money working to create more money.