Investing for kids

Investing for kids is about more than just saving money — it’s about building a solid foundation for their financial future.

By introducing your child to smart investment choices early, you can harness the power of compound interest and instill lifelong money management skills. Whether you’re saving for their education or helping them grow long-term wealth, there are tailored strategies to suit every family’s goals.

Best long-term investments for a child

When it comes to investing for kids, focusing on long-term growth can provide significant benefits over time.

From stocks and index funds to robo-advisors, each investment option offers unique opportunities to build wealth steadily. Let’s explore the best choices for securing your child’s financial future.

Savings bonds

Savings bonds are a conservative and secure option for growing your child’s savings, backed by the US government.

One of the key benefits is that they offer guaranteed returns over time, with interest rates typically tied to inflation for Series I bonds.⁽¹⁾ Some savings bonds are also tax-advantaged if used for educational expenses.⁽²⁾

However, the downside is that returns tend to be lower than riskier investments like stocks, and the funds may be locked in for many years.

Dive deeper: What are bonds?

Stocks

Investing in individual stocks can provide significant growth potential over time, allowing your child to benefit from the performance of specific companies. Historically, the stock market has delivered average returns of about 7% annually, adjusted for inflation.⁽³⁾

Stocks can also help children learn about ownership and how businesses operate.

However, stocks are subject to market volatility, meaning prices can swing widely, particularly in the short term. This volatility makes them riskier, but with long-term investment horizons, they tend to yield higher returns than more conservative options.

Index funds

Index funds are an excellent choice for those seeking low-cost, diversified investments.

These funds track a specific market index, such as the S&P 500, and spread your investment across many companies, which reduces risk.

Index funds have the advantage of passive management, resulting in lower fees and steady growth aligned with the broader market. However, they are still subject to market fluctuations like any market-based investment.

Dive deeper: See how to invest in index funds

Robo-advisors

Robo-advisors simplify the investment process, offering a fully automated approach to managing your child’s investments.

These platforms build and maintain a diversified portfolio based on risk tolerance and financial goals, rebalancing automatically over time. The ease of use and low fees make robo-advisors ideal for parents who want a hands-off approach to growing their child’s savings.

On the downside, most robo-advisors charge management fees and may offer less personalization and flexibility than traditional financial advisors.

Alternative investments

All assets outside traditional investments, such as stocks, bonds, exchange-traded funds (ETFs) and mutual funds, are considered alternative investments. They can provide diversification, the potential for high returns and protection against market volatility.

Real estate crowdfunding is a lesser-known investment option but can be a great way to introduce your child to the real estate market with a small initial investment.

Platforms like Fundrise allow users to invest in real estate projects and earn returns through rental income and property value appreciation. This option combines long-term growth potential with the excitement of real estate investing. However, liquidity and market risk are factors to consider before diving in.

You could also explore other creative investment opportunities like starting a small business or peer-to-peer lending, each offering valuable lessons in finance and entrepreneurship.

Investing accounts for kids

From custodial accounts to tax-advantaged savings plans, each option comes with unique features designed to help parents build their child’s financial future.

Some of the most popular accounts available include:

• Custodial trust accounts. Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA), allow parents or guardians to manage assets on behalf of their child until they reach the age of majority. These accounts are flexible, enabling you to hold various assets, including stocks, bonds, mutual funds and even real estate. The primary advantage is that they offer a way to transfer wealth without needing a trust fund.
• Custodial IRAs. Custodial individual retirement accounts (IRAs) hold income from minors but are managed by parents. Assets put into the account are managed by the custodian until the child reaches the age of 18 or 25, depending on the state in question. Much like a regular IRA, custodial IRAs can be both traditional IRAs or Roth IRAs, with the same respective rules and advantages.⁽⁴⁾
• Brokerage accounts for kids. Unlike custodial trust accounts, where the custodian manages the account on the child’s behalf, brokerage accounts for kids are kid-owned. While parents typically can view the account and activity, the child owns and manages the investments. The Fidelity Youth account is an example of a teen-owned brokerage account.
• 529 savings and investing accounts. A 529 plan is a tax-advantaged account designed specifically for education savings.⁽⁵⁾ It allows parents to invest in a range of assets, with the earnings growing tax-free as long as they are used for qualified educational expenses. One of the key benefits of a 529 is its high contribution limits, which makes it an excellent tool for long-term saving. A common question parents have is “how much to save in a 529?” This amount depends on your education goals and timeline, but experts generally recommend starting early and contributing regularly to maximize growth.
• Debit cards for kids with investment features. In recent years, several debit cards tailored for kids, such as Greenlight and Busykid, have introduced features that allow children to invest part of their allowance or earnings. These cards are designed to teach financial literacy by letting kids manage their spending and saving while also providing investment opportunities. Greenlight, for example, offers a feature that lets kids invest in stocks and ETFs with parental oversight. These cards are an excellent way to introduce children to the basics of investing and budgeting at a young age while providing a hands-on learning experience.

Dive deeper: Investing apps for teens

Benefits of investing for kids

Investing early offers several long-term advantages for kids, from financial growth to life skills development.

• Compound interest. The power of compound interest is one of the most compelling reasons to invest early. By reinvesting the earnings from investments, you allow the initial amount to grow exponentially over time.⁽⁶⁾Even small contributions made when a child is young can result in significant wealth accumulation due to compounding. The longer the investment horizon, the more profound the effect of compound growth, making it a key advantage for early investors.
• Financial independence. Starting to invest at a young age helps set the foundation for future financial independence. As kids grow their investments over time, they learn the value of saving and the potential of creating wealth through smart financial choices. Early exposure to investing can encourage them to adopt good financial habits, which can lead to greater security and freedom in adulthood.
• Money management skills. Investing teaches children critical money management skills. By learning to balance risk and reward, diversify their investments and make decisions based on financial goals, they develop a responsible approach to handling money. These skills will serve them well in adulthood, as they’ll be more comfortable navigating personal finance challenges.
• Long-term goal setting. Investing also encourages long-term goal-setting. Whether saving for college, a first car or future financial milestones, children learn the importance of patience and planning. Setting and achieving investment goals provides a sense of accomplishment and helps kids understand the value of delayed gratification — a crucial lesson for financial success.

Common mistakes to avoid

While investing for kids offers great opportunities, parents should avoid some common pitfalls:

• Overcomplicating it. It’s easy to get bogged down in complex strategies, but kids benefit from a simple, straightforward approach to investing. Stick to basic investment options that are easy to understand and manage over the long term.
• Neglecting diversification. Relying too heavily on one type of investment can expose your child’s portfolio to unnecessary risk. Spread investments across different asset classes, such as stocks, bonds and funds, to minimize risk and maximize growth potential.
• Chasing short-term gains. Trying to time the market or chase high returns can lead to unnecessary risk. It’s better to focus on long-term growth and consistent contributions than jumping on the latest investment trend.
• Ignoring fees. Investment accounts and products often come with fees that can eat into returns over time. Be mindful of management fees, transaction costs and expense ratios, especially with smaller portfolios, to ensure that more of the investment goes toward growth.

Bottom line

Investing for kids is one of the best ways to give them a financial head start in life. By selecting the right accounts and keeping investments simple and diversified, you can set your child on a path toward financial independence.

Frequently asked questions

What is the best way to invest $1,000 for a child?

The best way to invest $1,000 for a child depends on your long-term goals. Consider starting with a diversified option like a low-cost index fund or a robo-advisor that automatically manages the portfolio. For parents focused on education savings, a 529 plan is a great choice, offering tax advantages and flexibility for future educational expenses.