One of the goals my parents had was to raise financially-literate kids. After all, as I highlighted in a previous article, money plays a big role in just about everything we do, so why wouldn’t you strive to set your baby up for financial success? And while money isn’t the end all be all, as adults we understand that financial freedom, independence and being happier is a helluva lot easier to achieve if we’re not worried about a low checking account balance!
In this article, I will highlight my thought process and the things we did for our daughter very shortly after she was born togive her a leg up for when she’s old enough to make her own financial decisions.
Starting Slow For Financial Success
To set your baby up for financial success you need to treat the race as a marathon, not a sprint. You get at least 18 years to impart good, sound and everlasting financial habits on your children. In fact, going too fast is a recipe for failure because, short of winning the lottery, there are no quick ways to obtain wealth. That must be communicated to our kids.
And remember, everything you teach needs to be age-appropriate. For example, you’re not going to talk about stocks and mutual funds with your two year old. At that age, you’re just trying to prevent your little goblin from eating and then shitting quarters. By the way, I’ve been there and done that. I liked the taste!
Conversely, if you wait until your kids are 16 or 17 years old to talk about credit or the virtues of saving money, well, is there any doubt it will go in one ear and out the other? Just like anything else in this world, striking the right balance is key.
The Importance Of Credit
*Warning* if you don’t pay off your credit card bills in full every month and/or currently have a lot of credit card debt, the next paragraph will not apply to you.
The first thing I did after I received my daughter’s social security card was add her to my Chase credit cards as an authorized user. This allowed her to instantly start building a credit history that will pay dividends by the time she’s ready and old enough to apply for credit when she becomes 18. I have American Express cards, too, but that company requires authorized users to be at least teenaged.
Unless you’re incredibly wealthy and can afford to buy everything outright, a good credit score is the key to qualifying to purchase things like a home or car, or getting your loan application accepted to start or build a business. But it’s not only about qualifying, it’s about the cost savings, too. A credit score in the 700s is worth literal thousands of dollars in interest rate savings versus something in the 600s.
I received the physical credit cards with her name in the mail a couple weeks later. Obviously, she won’t be using those anytime, so they are locked away in a safe. We are probably two expiration date cycles away before she’ll get the opportunity to use them, but meanwhile she’s establishing a credit history thanks to her mother and me.
Invest In A 529 Plan Right Away
A 529 plan is a great financial instrument for a number of reasons. First, you’re taking today’s money and investing it for your child’s future. With the cost of college tuition rising daily, putting a few bucks here and there into a savings account isn’t going to do much to chip away at the total bill. Second, in the majority of states there is actually a tax and financial benefit for you doing so. For example, in Ohio you get up to a $4,000 tax deduction each year. That amounts to about $300 a year. Not bad!
Right now, our budget affords us the opportunity to put $1,000 every six months into our daughter’s 529. I chose to invest in a fund that tracks the S&P 500. Historically, these kind of funds grow at an average of roughly 8-10% per year. If nothing else changed with my income and I kept to that contribution schedule, my daughter would have anywhere from $80,000-$100,000 in her 529 account.
You’re probably saying to yourself, “I think his math is screwed up. $2,000 a year for 18 years is only $36,000.” You are correct, but you’re leaving out the most important factor of investing: compound interest. The earlier you invest, the more time you have to grow your investment.
Even if you can only put $25 a month into the account for 18 years, your contributions would be but your if you put that in an S&P 500 fund then your balance could turn into $12,000-$14,000. And you can withdraw all of that money tax-free if it’s used to pay for tuition or related expenses!
Take This Gift For Financial Success
The last instant thing I did to set my baby up for financial success was opening a Robinhood brokerage account. The goal of this account is to gift my daughter stocks when she becomes old enough. Similar to the 529 account, I have chosen to invest the money into an S&P 500 index fund.
Some people may advise opening a custodial account for a minor to achieve my goal. I opted against doing this for two reasons. First, once she turns 18 the money would automatically be transferred to her. In case my wife and I had unforeseen financial difficulties, I wanted to make sure I had an option to pull that money back. Second, that account can be used against students seeking financial aid for college.
Because of the way my budget stands now, I do not have a consistent stream of money going into this account. So far, it only has about $300 six months after she was born. That has been funded virtually entirely with dividends from individual stocks that I own, with the occasional extra money that comes in from a variety of sources.
Plus, there are actually tax benefits when gifting stock to your children!
Action Is Better Than Inaction
“Perfect is the enemy of good.” That is one of my all-time favorite quotes. It is so easy to sit back and think, “when this situation is settled I’ll be able to focus on this situation”. When it comes to investing, any time spent delaying is preventing you from choosing to set your baby up for financial success.
Thinking that you need a lot of money to get started investing is just flat wrong. You simply don’t need very much to get yourself on the right track, and you need even less to set your baby up for financial success.
Hell, as I illustrated earlier, you don’t even need a dollar to take the first step in making your child’s future easier. You just need to take the free (unless you have a card with an annual fee) action of adding him or her as an authorized user to your credit card!
Add your child to your credit card. Open up a 529 and try to make consistent contributions. Create a brokerage account at a place like Robinhood and invest money when you can. If you do those three things then your child will be so far ahead of her peers in this marathon that we call life. Isn’t that all we can ask for?
