Am I Ready to Invest for My Kids? A Checklist for Parents

Last weekend, my 5-year-old packed her own backpack for an overnight with her grandparents: 13 stuffed animals and a single long-sleeved shirt. She still has a little way to go before she can manage her own property, which is why (of course) her dad and I take care of things for her.

In addition to making sure she packs her toothbrush and nightlight, we also manage her money. The funds in her investment account belong to her, but she won’t take control until she’s 18.

If you’re interested in putting money into an account for your child, here are some ways to think about whether you’re ready to invest for your kids, and how to ensure your account is on track.

Signs You Might Be Ready to Invest on Behalf of Your Kids

You want to give your kids every chance to have a secure, happy childhood and a strong foundation for their adult lives. Before you divert a lot of funds toward your children’s future, you’ll likely want to make sure that your current situation is fully stable. If you’re considering investing for your child, these signs can help you decide if your overall finances are in the right place to get started:

• You’re not living paycheck to paycheck: You feel reasonably secure in your family’s work situation and aren’t struggling to stretch money until your next paycheck. After all, you probably wouldn’t want to sock away money for your kids if your immediate needs aren’t covered.

• You have an emergency fund: You have at least the minimum amount saved to make you feel prepared to handle an unexpected situation (e.g., car breaks down, unexpected medical bills). If you’re still building your emergency fund, you will probably want to plan how to maintain that while also investing for your child.

• You’re saving for retirement: We’re not saying your retirement savings need to be perfectly on track before you invest for your kids (most people’s aren’t), but you probably want to make sure you’ve at least started a solid plan for your own long-term future before contributing to “nice to have” money for your kids.

• You have life insurance coverage: A well-rounded financial plan typically includes plans to cover a worst-case scenario. Life insurance for you and your partner can help provide meaningful peace of mind and a financial safety net if one of you passes away.

• You have a savings strategy for college: An investment account for kids—such as a UGMA account—might be your primary way of saving for your child’s future, or it might not. Some parents prefer the tax advantages and account control a 529 plan offers. Many families split college savings between various accounts, including savings, a 529 plan, investments and others. Whatever mix feels right to you, it’s good to have college plans in mind as you look into a UGMA.

• You have funds left over: One way to know you’re in a good position to invest for your kids is if you have money left over at the end of the month or your account balances generally trend upward.

What to consider if investing for kids isn’t right for you yet

If you’ve spotted areas you want to work on before prioritizing investing for your kids, outlining those goals is a small step toward a healthier financial picture. You don’t need to have totally flawless finances before investing for your child, but ensuring your foundation is strong will likely make it easier to expand beyond the immediate necessities.

Whether you’re ready to move forward with investing for kids or want to pause and tackle another financial to-do first, it’s helpful to consider what you hope your child will do with the money in the future.

How to Tell If Your Kids’ Investments Are on Track

When it comes to tracking progress in your kid’s account, the most important element is understanding your “why.” Parents start investing for kids for different reasons. Unlike a college- specific savings account, a custodial account like a UGMA can be whatever you want to make it, so your version of “on track” will differ from another family’s.

My family is an example of different approaches to similar accounts. My husband’s parents set up a custodial investment account when he was young. They expected him to contribute from his earnings when he was old enough to work summer jobs. They also made their own contributions. By the time he earned his graduate degree, the account had enough for a down payment on a home.

We’ve opened UGMA accounts for our three children, but for now, our contributions are small. Birthday money and other occasional contributions go to these investment accounts to take advantage of market growth and (hopefully) provide funds for a treat or a rainy day when our kids are adults.

A few potential reasons to invest for your kids include:

• Money for college or career training: If investing for your kids is part of your college savings strategy, you might want to check a calculator every year or so and see your progress. You’ll probably also want to define what percentage of your contributions will go into a UGMA and what will go into any other accounts you might be using, such as a 529.

• Down payment: It’s tough to say for certain what the housing market will look like in 10

  years (or however long until your kids are house-shopping). You can always start by looking at median home prices in your area and basing your savings target on a percentage (e.g., 10-20%). Even if your child’s investment account doesn’t cover the full down payment, tracking your progress based on this target might make homeownership easier for them.

• Milestone expense: While you can’t set restrictions on how your child uses the money in an account like a UGMA, you can explain to them that you intend funds to go toward a specific expense. You might research estimates for things like average wedding costs in your state or car prices to help set a goal for the account.

• No defined goal: It’s completely fine to open an investing account for your kid without a specific “why.” If your contributions are meant as a general starter fund or “bonus” money for your child, knowing this from the start can take the pressure off of contributing monthly or saving a specific amount. Simply allowing occasional contributions grow over time can be a gift your child will appreciate.

When you’re getting ready to invest for your kids (1), consider your family’s needs and intentions for your child’s account. Investing in a custodial account may be part of a well-rounded financial plan for your family.

(1) Not an offer to purchase any specific product or strategy.

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