Kid's savings

[MountainMedic]

I am a 35 y/o married male with wife and 7 y/o male, 5 y/o female and 3 y/o female. We fund 529's for our children but I am debating how to help them invest some of their savings. They each have "spending" money of around $5-$10, "savings" account for larger purchases which we cap that account somewhere around $100) and "investments" for down-the-road items like cars and homes. They each respectively have $600/ $400/ $300. I have tried to search for ideas within this forum but don't seem to come up with ideas that really match our direction for how to invest their "investment" monies. I am very new to FIRE and am just beginning to understand investments. I would ideally like to open a Roth-style account but none of the kids have earned income. Until they do, I am trying to decide how to place this money. For the wife and I, we currently have all of our money (savings, Roths, 401k's and HSA) in money market accounts and are soon to transition into ultra short-term government bonds. We are simply following the moving average and have decided that the market is not going to go all that great for a while so we just want to stay conservative. With the kids money, though, we are okay with assuming quite a bit more risk. We are just ignorant on the best method. Since we are not financially sophisticated, I want to keep things simple. Should we just buy the kids Wal-Mart, Microsoft or Conoco-Phillips, go into an emerging-markets fund like Fidelity New Markets Income, is it too late to buy into potential easy money of BP, just buy a good mutual fund... What ideas do you all have? Remember, keep it easy for us newbies, but please provide a rational as I want to understand your ideas. Thank you for the help and any ideas are welcome.

-MM

 

[ziggy29]

I am a 35 y/o married male with wife and 7 y/o male, 5 y/o female and 3 y/o female. We fund 529's for our children but I am debating how to help them invest some of their savings.

...

For the wife and I, we currently have all of our money (savings, Roths, 401k's and HSA) in money market accounts and are soon to transition into ultra short-term government bonds. We are simply following the moving average and have decided that the market is not going to go all that great for a while so we just want to stay conservative. With the kids money, though, we are okay with assuming quite a bit more risk.

I could be wrong, but it seems to me that the time horizon for a 35-year-old's retirement savings is *longer* than that of a 529 plan for three children aged 3 to 7. In that sense, it would seem you are willing to assume *more* risk in the savings with the shorter time horizon, which seems backward to me. In other words, your Roths and 401K have more time to recover from the market "not going all that great for a while" than the 529s do. Plus, it's easier to adjust your retirement date if things don't go well than it is to adjust the date your kids are ready for college and ready to tap the 529.

 

[MountainMedic]

Ziggy-

I am sorry that I did not make myself clear. I was really only injecting the info regarding myself and wife to help introduce us and to say that we are wanting to be conservative in a time that we view to have potential for loss. Regarding our children, I was speaking only of money *apart* from their 529's and was suggesting that with this money, we are willing to be much more liberal with the investment of that money as it will not be significantly tapped until after college (we hope.) I can see where I confused the savings accounts and the 529's. Sorry for that. I certainly agree that the 529's will be utilized before our retirement accounts. We are not looking for advice (yet) with the 529's, nor on the wife and I's retirement accounts, but only with savings funds designated for "investments."

Thanks, MM

 

[LOL!]

I wouldn't worry about the kids at all. Let them earn their allowance and spend their money. If they amass $3K to $20K before college, it won't matter one iota. They will have lost out though on a lot of experiences that that money could've have bought them.

Basically, teach them to be good consumers. Let them make mistakes with their own money while it is not a large amount. That video game that cost $50 that they never play with. The ipod that they left at summer camp, etc.

When they are older, it's should be easy to give them money out of your accounts as in, "We've been saving for a car for you for years, here's $100K to get that Porsche."

529 plans are good if you have taken care of the parents' needs and retirement. But if you have the money, why not spend it on experiences for the kids: summer in France to learn French, summer at a web programming to become a web guru, a few weeks in Vienna playing the violin, a month in Hawaii to become a scuba diver, etc.

 

[FUEGO]

To the OP:

My kids are roughly the same age. We started UTMA accounts for them at Vanguard and put their money into the STAR fund. $1000 minimum investment. Simple.

The funds are mostly birthday and Christmas gift money (primarily gifts from DW and I). The oldest kid is 5 so she is just now starting to understand numbers, money, buying things etc. so I'll probably start letting her spend more of "her" money on things she wants.

I set up the accounts mainly to have somewhere to put their money that is better than 0.xx% money market accounts. Maybe I'll show them how they can spend the stream of dividends from their account. Teach them the concept of living off of one's investments at an early age.

It is also tax free income in the amounts we have invested.

 

[jayc]

I opened DRIP (div reinvestment plans) with Exxon, P&G, AT&T..etc using their SSN for tax purposes. You can send in as little as $50 and most plans put it all toward the stock. It is also a learning tool to show them the different types of investments.

Example of Exxon: ExxonMobil (XOM) DRIP - Dividend Reinvestment Plan Advice

 

[Nords]

Assuming that you guys are fully funded in your own retirement accounts, and assuming that you've put as much into the 529s as you deem necessary...

You have no reason to take risks with these funds-- the extra money won't necessarily improve your kid's lives but a loss will have them hating you forever. You don't want to know how I've learned about that.

Perhaps the best option is to put them in I bonds for now and reconsider the oldest's assets in five years or so as they approach their driver's learning permit.

You could try the ideas in David Owen's "First National Bank of Dad" for CDs and "Kid 401(k)"s. Start the kids out small so that their kid-account balances never actually exceed what you have available in the real accounts.

A kid can have a Roth IRA as soon as they have earned income, which some parents choose to declare as household chores or other schemes. The problem is that their "annual income" rarely meets the minimums for IRAs with companies like T.Rowe Price. While some young kids could have Roth income from modeling or acting, I suspect most of the tricks to fund a young kid's IRA only attract the attention of the IRS.

Our kid started her Roth when she turned 14 (work permit age) and got her first job. She made her first contribution in March of her second year of working so that she could open an account with a sizable contribution.

 

[MountainMedic]

Thank you for the replies. LOL!, apart from money given to them for bdays and Christmas, our kids earn their money from household chores completed daily and paid for weekly. They also have personal and household chores that they get no pay for... it's just being part of the family. Their "savings" account is for purchases like video games and other toys. Their "investments" account is for exactly that and that is the one that I am concerned about. You are absolutely correct that they need to learn how to be wise consumers and we believe that use of their "savings" money will allow them to save for a purchase, decide if that purchase is still what they want and then they can see how that purchase works out for them. On the other hand, we would like for them to have money to learn about investments with and possibly make a small nest egg. We also enjoy family vacations together to do exactly the things you speak of. jayc, I had never heard of a DRIP plan. I will read up on that. That may be right up our alley. FUEGO, that 0.xx% account is exactly what I am trying to avoid. I breezed over UTMA accounts may need to revisit that idea. Do these accounts allow frequent transfers into the same account and to invest those funds? What are the tax consequences? Nords, thanks for the suggestions of the David Owens information. I will read that. Thanks, all, for the help.

-MM

 

[FUEGO]

FUEGO, that 0.xx% account is exactly what I am trying to avoid. I breezed over UTMA accounts may need to revisit that idea. Do these accounts allow frequent transfers into the same account and to invest those funds? What are the tax consequences?

UTMA is just the name/type of account. Pick a custodian, could be an uncle, could be a parent. In this case it is you the parent. You are listed as the custodian "for the benefit of" your child. Tax wise, it is a regular taxable account for your kids. At 18 or 21, depending on your state's laws, they will retitle the account into the kid's name.

I think kids get ~$700 tax free income per year before you have to pay taxes on that income at the parent's marginal tax rate. I'm a little fuzzy on this aspect of tax law, so you may want to do your due diligence.

You still have to keep track of the tax basis so that one day your kids can properly report the gains/losses on the sale of shares.

I figure it isn't a lot of money, and the kids won't get "rich" off this account. But it is something they can look at as they grow up to see how the account value changes. Just another learning tool. We plan to be FI and retired during the latter part of our kids' childhood, so it will be a neat illustration for them of what investments can enable you to do. And hopefully at a relatively early age they will be comfortable with investments and since the current investment is housed at Vanguard, they will be well suited to stay with the current fund company. Of course our kids are years away from being able to really understand anything of substance regarding investments, asset allocation, risk/return, etc, but this type of knowledge is something I hope to pass on to my kids. Encourage a little inter-generational wealth building.

 

[LOL!]

A heads up on DRIP programs: They are an obsolete anachronism which no one should start anymore. They made sense when it cost $300 commission to buy/sell a share of stock. They don't make sense when many places give free trades (WellsFargo PMA, Schwab, Fidelity, Vanguard).

My kids have 529 plans, UTMAs (started by grandma), allowances, and the oldest has her own Roth funded from her job in high school as well as 2 free checking accounts. Kids are so busy I doubt you will be able to teach them much about investing. It's worth a try ... just don't expect much success until they have an interest.

 

[jayc]

A heads up on DRIP programs: They are an obsolete anachronism which no one should start anymore. They made sense when it cost $300 commission to buy/sell a share of stock. They don't make sense when many places give free trades (WellsFargo PMA, Schwab, Fidelity, Vanguard).

My kids have 529 plans, UTMAs (started by grandma), allowances, and the oldest has her own Roth funded from her job in high school as well as 2 free checking accounts. Kids are so busy I doubt you will be able to teach them much about investing. It's worth a try ... just don't expect much success until they have an interest.

I have the same opinion of mutual funds. Too each his own, you spin the wheel and you take your chances.