How Does Investing for Kids Really Work?

Investing for your child can help you set up their financial future and teach them valuable skills. It can also seem more complicated than helping your kid with math homework—but you don’t need to be an expert to get started.

For the purposes of our article, when we talk about investing for kids, we are talking about a Uniform Gift to Minors Act (UGMA) account. Many UGMA options make it easy to contribute money and choose an investment strategy that’s right for you. Learning the basics of how the account can help grow your child’s money can boost your confidence. If you want to go deep, here's more on how money flows through UGMA accounts, specifically.

How Investing Works

Investing puts money to work in a more active way than saving it in a bank. You start by putting money into a portfolio. Your portfolio can include a combination of different investments. Stocks are shares in an individual company. Bonds are essentially a loan you make to a government entity or corporation. Mutual funds pool money from many investors to invest in securities, and exchange-traded funds (ETFs) invest in a basket of securities that often includes stocks, bonds and other securities.

As your portfolio earns returns (e.g., interest from bonds, change in stock value), you’ll see gains and losses reflect in its overall value. If you have investments that offer dividends, reinvesting these can help your investment continue to grow. Your investment gains may be higher than a bank saving account’s interest rate, and you can continue the cycle of reinvesting those gains to have more opportunities to grow money for your child.

Any of your investments can go up or down. If you see an investment drop in value, don’t panic. Rushing to sell an investment can lock in or “realize” your losses, which can sometimes be a good thing for tax purposes. That said, sometimes simply leaving an investment alone can be a sound strategy, because the value may climb again in time. The idea is that over time, you can ride out market dips and keep building on your gains (including reinvesting to earn more).

Check out our investing glossary for key terms you might want to understand.

Common Questions About Investing for Kids

So you’ve opened a UGMA account to do a good thing for your kid and realized you’re not exactly sure what you’re doing. The hardest part may already be behind you—taking action to find and set up a new account is no small feat in a busy family schedule, and a UGMA account can be simple to manage. Here’s what to know once you get started.

Where is my money going?

A UGMA account can hold various financial assets. You can keep cash in the account or invest any contributed money.

The exact details about your account and portfolio options can vary depending on which UGMA account you chose. In many cases, you’d get a UGMA through a bank or a brokerage company—or through Fabric by Gerber Life. When you review your options and set up an account, you should be able to find information about choosing settings or investment plan options for your contributions.

Does a UGMA account invest in the stock market?

You can invest in the stock market through a UGMA. You may also be able to invest in bonds, mutual munds and ETFs if you want, or leave a certain amount of cash in the account.

Depending on the company you choose to open a UGMA account with, you may be able to handpick investments, or you might have the option to choose from a set of portfolio styles (e.g., aggressive, conservative) but not select individual investments. When you review UGMA options, consider whether you want to self-direct investments, or if you’d prefer the convenience of an account that creates a portfolio for you.

For example, the UGMA through Fabric by Gerber Life makes it easy to get started because you only need to choose how conservative or aggressive you want to be in your portfolio, and the rest is taken care of for you so you can get back to everything else in your life.

How does this account make money?

You may earn interest on cash in a UGMA account, but interest rates can be low, possibly even lower than a traditional bank savings account.

Investments, however, have greater growth potential than a conventional savings account’s typical interest rate. Data going back to 1971 indicates that the S&P 500 has an annualized return of around 7.5%, or over 10% with dividends reinvested. Past performance isn’t a guarantee of future gains, and the market can go down as well as up, but many investors keep money in the market with the expectation that the long-term result will help grow their money.

Can I lose money?

Any investing option comes with a degree of risk. You can lose money on investments in a 529 plan, a retirement account like a 401(k), a brokerage account or a custodial investment account like a UGMA. Typically, people choosing these options expect that the overall trend will lean toward gains.

If your risk tolerance is low, one option is to consider investments like bonds, which are generally considered more conservative. If you have years before your child comes of age, you may have wiggle room to wait out a market dip. Your child also might not use these funds right away. If the market is down when your child turns 18, they may have less in their account to put toward college—but could potentially qualify for more financial aid if they have fewer student assets, and their account balance may rise again by the time they’re thinking of putting a down payment on a home.

Am I investing in the S&P 500?

The S&P 500 is an index, not an investment in and of itself. You can’t directly invest in an index like the S&P 500. What you can do is invest in index funds or ETFs, which are designed to respond similarly to the broader index they’re based on.

Is Investing for My Child Risky?

Any investment comes with some degree of risk. When you put your money to work by investing in company stock shares, ETFs or mutual funds, you hope the success of these securities will reflect in gains for you, too.

You can adjust your investment strategy to fit your risk tolerance. People with a long timeline to wait out a potential market low may be more willing to go for bigger risk and greater potential reward. In other cases, especially as an important event in your or your child’s life draws near (e.g., enrolling in college), you might prefer a more conservative approach, even if it also comes with lower potential gains.

UGMA vs. HYSA

Bank savings may not be affected by market performance, but they are risky in their own way, too. They are likely to earn interest at a rate below inflation, meaning your savings may lose purchasing power over time. The average interest rate for traditional bank savings accounts is only 0.45%, whereas the inflation rate for the 12 months ending in July 2024 was 2.9%. A high-yield savings account (HYSA) can offer substantially higher interest rates, with some banks offering rates over 5% as of August 2024. This can be an option that can match or outpace most of the inflation rates in the last 10 years. Even so, this is a lower rate than the historic market performance for investing.

Content within is not intended as an offer or solicitation to purchase or sell any specific security. Not to be construed as investment advice. Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. You cannot directly invest in an index. Index returns are not reduced by management or other fees. Past performance is not indicative of future results. Investing in securities involves the risk of loss. Age of majority varies by state. Learn more at meetfabric.com/UGMA.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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