Creating a financial future plan for your child is a good way of giving them a foundation to build on when they step into 2023. Custodial accounts and early investments are good ways to make sure your child has a secure financial future.
Give Your Kid a Head Start
The pandemic has thrown life as we know it completely out of balance. If anything, we’ve gotten to know the importance of having emergency funds and saving up for a rainy day over the past two years. Now that we know how it feels to face a sudden financial crisis, how can we make it easier for our kids to get through something like this if it ever happens to them?
Giving your child a head start is a good way to prepare them for the harsh realities of this world. Planning their financial future is important and can give your child a financial foundation to build on when they get older. Once you start setting up a plan, you can educate your child as well as they grow older.
Of course, you will have a lot of things planned for your child as they grow up. But while making a financial plan, it’s important to take it slow and steady. Start planning small and then build onto the bigger things. Or make a big goal and break it down into smaller goals that you can achieve easily. Let’s look at how to go about planning your child’s financial future the right way.
Start Your Child’s Investments Early
The biggest myth about finances is perhaps the fact that people think putting all their money into the bank is crucial. Yes, it is important to have money saved up in the bank for emergencies and the future. But it is also important to grow your wealth and not just earn a small amount as interest every year. Building wealth for the future is just as important, especially for retirement.
Instead of putting everything into a savings account for your child, how about investing 80% of it into an investment account? Your child’s investment portfolio will get a massive head start and it will earn compound interest. Your child will get to learn how to grow money through the power of compounding and use the tactic for their own investments in the future.
Most parents who plan their kid’s financial futures usually put the money into traditional brokerage accounts. These accounts help build wealth by investing the money and letting compound interest do its magic. Other parents put the money into a 529 college education savings account.
If you plan on choosing the 529 education savings account, remember that you cannot use this money for anything else other than your child’s education. If you do, there will be penalties for it. So, even if your child gets a scholarship in the future or doesn’t need the education funds, there are other ways you can use it for educational purposes. Just know that using it to buy a car for yourself will result in penalties.
Create a Custodial Account
A custodial account is a savings account for your child that will be operated by you. It allows children to hold investments in a number of assets including artwork, real estate securities, cash, bonds, mutual funds, etc. Set up an account and manage it for your child till they are old enough and financially educated enough to start managing it on their own.
Pay Your Child Salary Like an Employee
If you own your own business, you can pay your child a salary of up to $12,500 every year without them having to pay taxes for it. Of course, your child needs to have a role within your business for this. Since you’re going to be paying for your child’s expenses anyway, you might as well take advantage of this provision and pay them a salary and teach them how to use the money for their expenses.
Older children need to learn how to handle money in the real world. Starting them off while they are still young by giving them an allowance and teaching them how to handle it is a good way to set them up for the future.