CommonCentsMom.com is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. The contents of the CommonCentsMom.com website, such as text, graphics, images, and other material contained on this site (“Content”) are for informational purposes only. The Content is not intended to be a substitute for professional financial or legal advice. Always seek the advice of your Financial Advisor, CPA and Lawyer with any questions you may have regarding your situation. Never disregard professional advice or delay in seeking it because of something you have read on this website!
As a parent, you want to give your children every opportunity to live a fulfilling and comfortable life. One of the most effective ways to do this is to invest in their future financial security. If you have the capacity to start an investment for them while they’re still young, then that investment can accrue interest over many years.
However, managing investments is often immensely time-consuming and somewhat stressful. It also requires you to have relatively in-depth knowledge of the subject if you want to make a success of it. Fortunately, there are several lucrative passive investment options available today that can help you save money. Earning credit for your children has never been easier if you use any of these 6 passive saving options.
1. Custodial Accounts
A custodial account is one of the most popular investment strategies for new parents. It’s created and managed by a parent on behalf of a minor. This means that you can invest money on behalf of your children and, when they’re of age, the account will be in their name. Depending on which state you live in, your children can manage the account from the age of 18 or 21.
This type of account is set up under the Uniform Transfers to Minors Act (UTMA) which expanded on the Uniform Gifts to Minors Act (UGMA). It offers many advantages, with one of its only downsides being that it’s not tax-advantaged.
2. Dividend Reinvestment Plans
This option, commonly referred to as DRIPs, is an attractive passive investment strategy. The program allows investors to automatically re-invest their dividends. In other words, your dividends are not paid out incrementally as cash. Instead, they’re fed back into your original investment, which means that you receive additional shares in a company’s stock.
DRIPs are excellent for those wanting to build a portfolio without having to invest time and energy into consistently monitoring trading activities. However, not all companies offer DRIPs, so you need to note that options for this type of passive income are more limited than most.
As with most passive investments, you need to be patient with DRIPs as your dividends are being continually reinvested. Starting while your children are still young is highly recommended in order to maximize the total financial growth of this investment.
3. Roth IRA
The primary appeal of a Roth IRA is that it’s a tax-advantaged account. This account is typically used for retirement funds, but it’s a popular option for parents who are looking to invest in their children’s future too. Roth IRA offers both tax-free growth and tax-free withdrawal. Your money must be in the account for over 5 years and you must be older than 59 and a half years to withdraw the money without getting taxed.
This tax-free withdrawal is made possible by the fact that your investment will be after-tax dollars. A traditional IRA account allows you to invest tax-free—giving you a tax break. But the taxes you pay on withdrawal later in life are significantly more, and this detracts substantially from your overall return.
4. Invest in Real Estate
Investing in real estate is one of the most lucrative passive investment strategies, especially if you invest in the right real estate. That said, investing in real estate is inaccessible to the vast majority of new parents living on an average household income.
Thankfully, there are more financially realistic ways to invest in real estate. The best, not to mention safest, way to do this is through real estate investment trusts or REITs for short. REITs own and manage apartment blocks, office buildings, and other commercial real estate that generates steady income.
When you invest in a REIT, you will passively earn a share of the income generated by that particular REIT’s portfolio. These returns are generally higher than other passive investment options. Furthermore, they offer attractive diversification, which makes your investment safer than some other options.
As new parents, you’re likely saving for retirement and potentially paying off a mortgage. Investing to earn credit for children is just one of your many monthly expenses. Investing in REITs is an excellent way to reap the rewards of a booming property market without putting all your eggs in one basket.
5. Invest in Stocks Through Exchange Traded Funds
Exchange-Traded Funds, or EFTs, are among the most popular passive investments for parents who want to earn credit for their children. EFTs are investment funds traded on stock exchanges, as if they were individual stocks. An EFT is designed to track a specific index, such as the Dow Jones Industrial Average or the S&P 500.
EFTs allow investors to gain access to a basket of stocks in a manner that would not be totally possible without thorough and consistent research. They don’t require you to meticulously study the stock market, thus making them the perfect passive investment choice for parents wanting to invest in the future financial security of their children. Another benefit of EFTs is that they will typically offer low fees while boasting broad diversification.
6. Savings Bonds
If you’re searching for a passive investment with minimal risk, then a savings bond might be your best bet. The primary appeal of a savings bond is that it’s fully supported and endorsed by the United States government. This is why they appeal to the more risk-averse. You can purchase savings bonds through a number of channels. You can buy them at banks, other financial institutions, or even online. Plus, their value is practically guaranteed to increase every year.
It should be noted that, while savings bonds are low risk, they also have relatively low returns. They’re certainly not a get-rich-quick solution. Instead, they should be viewed as a slow and steady investment that you can confidently trust to nurture your child’s future nest egg. After all, if you invest while your children are still young, then your money has years to grow at a steady pace.
There are numerous easy ways that you can set your children up financially. Whether you invest in real estate, open a custodial account, opt for online stock trading or any of the other passive income ideas listed here, you can save enough to provide for a secure future.