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When it comes to helping kids save money, there are just so many different options. Of course, you could go with the traditional savings account. However, those generally don’t keep up with the rate of inflation, so they will actually be losing money. There are also money market accounts and CD’s, which can be some other better options. And if your child has any earned wages, then you can open up a custodial Roth IRA for them. Roth IRA’s can earn the highest market returns of an average 8%. But, if they don’t have any earned income, you can’t use those types of accounts. This is where a UTMA account comes into play instead.
What is a utma account?
A UTMA account is a Uniform Transfers to Minors Act account. This is a custodial account that is for taxable investing. Which is slightly different than a Roth IRA account, in that anything your child withdraws from the account in the future will be taxed.
We opened all of UTMA accounts at Fidelity, since they are one of the few that have custodial accounts. Initially, we planned to open all of the Roth IRA’s and UTMA’s with Betterment, since that is where our Roth IRA’s are. But, we found out that they don’t support custodial accounts yet, so that wasn’t an option.
Since I had an old 401k with Fidelity, it just made the most sense to stick with them. Plus, their customer service is amazingly helpful. So, if you decide to open either a Roth IRA or a UTMA for your child, you can call them and they will walk you through the whole process.
HOw can it be funded?
UTMA accounts can be funded through any account you care to connect to it. They don’t have the restrictions that Roth IRA’s do when it comes to the funding or where it comes from. What this means is that you can attach any account with EFT (Electronic Funds Transfer) capability to each UTMA. Most banks won’t open anything other than a savings account for younger children, which don’t have EFT functionality, though. So, if you have younger children, you will probably have to fund their UTMA accounts with your own checking account.
Initially, we found out that some of the kids had savings bonds purchased for them when they were first born. Instead of just letting them sit there earning very little interest, we decided to cash them out and put the money into their UTMA accounts instead.
However, you can put money into these accounts at any time for any reason. So it wouldn’t just have to be from old savings bonds.
We also found that some grandparents like to give money for birthdays and holidays. Or they send us a check to get their gifts and we don’t spend all of it. So we have started putting that “extra” money into their UTMA accounts also. This way it will really help the kids in the future because they don’t even realize the money is there. And, they aren’t just getting more toys for us to break our toes on. Bonus for us!
With that being said, here are some ways you can think about funding your children’s UTMA accounts:
- Old savings bonds
- Extra birthday money
- Allowance money
- Side hustle money (kid’s lemonade stand, yard work, etc.)
- Money for good grades
- Gifts (just because)
teaching about investing
One of my favorite things about these accounts, besides how easy they are to fund, is that it helps us teach them about investing. Even the youngest one, at the ripe old age of 8, has found this to be a lot of fun.
Once you put money into the UTMA account, it just sits there in a money market earning basically nothing until you choose your investments. The kids can invest in mutual funds, individual stocks or ETF’s.
Teaching them the difference between the three is just the beginning of the lesson. Once they grasp the different types of accounts, then I let them find companies they are interested in. I had to explain what publicly traded meant a few times, but once they got that concept, they were on a roll.
After they wrote down a list of everything they were interested in, then came the extra fun part for me. I like for the child to see how certain assets are performing before they decide whether to pull the trigger or not. There are many different places to look up ticker symbols to find out how they are performing.
Marketwatch is a good one to start with because it is very in depth. But, if you can’t remember where to go, you can always just type in the ticker symbol in the Google search box and the first thing it usually pulls up is how the stock is performing.
I like to make sure the kids see how an asset has been performing for the past 6 months, 1 year and 5 years. A lot of times this has changed their mind about purchasing a certain fund because they don’t like how it has been performing.
I answer all of their questions to the best of my ability, but I don’t want to choose for them. This is a huge learning experience for them while they are young, so I don’t want to push them one way or another. After all, if they lose money on their choices right now, it won’t really hurt them financially in the future. So this a great time to get their feet wet.
utma account summary
Overall, opening up a UTMA account for your child is a great way to help save for their future. While these accounts are a bit different than Roth IRA accounts, they operate fairly similarly with rate of returns. These accounts have the potential to net your children some great interest on money they aren’t spending while they are young. Which means they have the opportunity to create a decent sized nest egg before they leave your nest.
Plus, you get to teach them about investing and the stock market. Which is a great lesson to learn while they are young. I know I wish my parents would have taught me more about it when I was younger, because I would have been a much savvier investor in my early twenties. But, you can’t change the past, only the future. And that is exactly what we are trying to do with our children by opening up UTMA accounts for them now.
Have you heard of a UTMA account or opened one up? If so, what has been your experience with them so far?
Some investors choose to generate passive income by investing in dividend stocks. This method provides you with a small payment based on the number of shares you own and dividend yield. It can be an excellent way to diversify your portfolio and help ensure you receive some type of income on your investment regularly. Read more
When you have young children, teaching them about money is a big part of our job as parents. And this is especially important when they are young because they learn so much more quickly when they are younger. And, they are more apt to listen to us and follow our actions because they look up to us greatly at this age. Not as much once they hit the teenage years! To the earlier you can start, the better.
But it’s not always easy, or fun. Especially when they are really young because the concepts can be much too difficult for them to grasp. However, I have found some great ways to make teaching young children about finances fun. And not just for them!
One of the easiest financial lessons I found to begin with was grocery shopping. When my children were around the age of 2, they began helping me make a grocery list. I found the best way to approach this was to have them go through the pantry and refrigerator while I wrote down a list. They would ell me what they thought we needed and we would discuss it. Because sometimes what they thought we needed was ice cream and cookies!
Whenever we went to the store I would have them help me decide which items to buy. I started out simply by comparing the same item but different brands. That way it was easier for them to see the cost difference between the two products.
Example: If Brand A can of beans costs $.89 and Brand B can of beans costs $.99, which one is the better deal.
This math is usually simple enough for them to grasp when they are much younger. As they got a bit older, I would increase the complexity of the math needed. In that, I would then compare similar products that had different quantities also. This can be pretty confusing for them initially. But once they understand it, it’s a really fun game for them to find the best deal.
Every member of the family should be pitching in to help. So, chores and allowance are another great way to approach teaching young children about finances. However, with the allowance comes some strings. Besides not getting paid if they don’t do their age appropriate chores, they also have to create a budget for it.
One of the most common ways to create an allowance budget is to split it up into the following 3 categories:
Of course, you can discuss this with your children because they may have other categories in mind. But these 3 categories are usually the most simplistic to begin with.
Once you have the allowance budget categories defined, then it’s a good time to open the discussion with your child regarding how much should go in each category. Percentages are easier for us as adults, but may not be as easy for your young child to grasp.
Therefore, if may be best to start with a specific dollar amount in each category.
Here is a good example of both options for a simple $10 allowance since this number can be easier for them to understand from a percentage perspective.
- $10 = $2 for Donations, $4 for Saving, $4 for Spending
- $10 = 20% for Donations, 40% for Saving, 40% for Spending
Ultimately, how this is broken down is completely up to you and your child. The main point is that they begin to learn the basics of budgeting their income. So that it will be much easier for them as adults when they have to do it for themselves.
sell their old stuff
As most of us know, with children comes a lot of extra stuff. And as they grow, they outgrow that “stuff” fairly rapidly. Most of the time, the majority of it is also barely used. So, this is another great area to weave financial lessons in for your young child.
When it’s time to declutter the house, have your child go through their stuff to sell also.
The first thing to go through with them is which items they might be able to sell. And then you should have them help you figure out how much they think they can sell the items for.
A lot of times I prefer to sell my kids outgrown stuff online. But, having a yard sale is another great way to approach this lesson since your child will have to be physically present for it.
This lesson helps to teach them the value of their stuff and the value of a dollar. So, it’s really a two-fold lesson that is extremely important for them to grasp now.
Plus, it’s a great place to add on a third lesson while you are at it. Let them keep the money they make on their stuff and put it into a high yield savings account. That way they can watch it grow each month and you can help them learn about compound interest. Now, I call this a big win!
And last but not least, the birthday budget. I think my kids always think that money grows on trees. Which is extra funny because we actually have a money tree, but it doesn’t grow money!
With that being said, their birthday wish lists always start out much further outside the budget than they think. So, it’s a good time to bring them back down to earth and have them help with a more realistic birthday list.
First, let them know what the budget is for their birthday. The best way I have found to do this is to tell them that they need to find some gifts that are under $20 and they can find one or two that are closer to $40 – $50 also.
This way, the majority of the birthday gifts they want fall into most people’s budget. And the couple of larger gifts could be from us or a joint gift. But, I also let them know that they will never get everything on their list. That way I help to set up their expectations and keep a bit of the birthday surprise going.
Teaching young children about finances
Overall, there are a lot of great ways you can begin teaching young children about finances and it still be fun. My favorite ways include:
- Having them help make the grocery list and compare food prices
- Make an allowance budget
- Selling their old stuff and putting the money into a high-yield savings account
- Creating a reasonable birthday budget
If you can start with these easy lessons, then you are well on your way to increasing your child’s financial knowledge. And the earlier you can start, the better. So, have fun with it and get started today!
What are some of the best ways you have found to teach your young children about finances and still make it fun?
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