The following is a contributed post from Stephen Dissette, investment advisor representative with Horter Investment Management.
The time has come to completely rethink how we fund the next generation. Standard savings methods leave kids behind, so parents must make strong financial moves to help their kids actually afford adulthood and beat inflation.
Many parents are working tirelessly to build a brighter future for their children, but inflation is quietly eroding the purchasing power of the money that has been set aside. With a myriad of options out there, let’s take a look at some specific steps to help set children on track to financial success.
Traditional savings accounts, while safe, are essentially acting as a losing battle against the rising cost of living and higher education. It’s time to rethink what it means to be financially responsible for the next generation.
In fact, I believe the single biggest mistake parents make is relying too heavily on basic savings accounts for long-term goals. While they offer safety, these accounts typically yield interest rates that don’t keep pace with inflation, meaning the purchasing power of that money actually decreases over time. To truly build wealth for the future, parents need to look at growth-oriented investments that can outpace inflation and benefit from compounding interest over the long haul.
3 Tips to Help Parents Maximize Their Savings
Tip 1: Ditch the “safe” accounts and deploy advanced wealth tools instead.
Parents need to trade low yield, traditional savings accounts for growth-oriented investments that actually crush modern inflation.
It’s important to maximize high impact vehicles like 529 plans, custodial accounts, minor Roth IRAs, and the new Trump accounts (530A IRAs) with tax deferred growth and potential government kickstarts.
A 529 College Savings Plan is a powerful investment, if higher education is a goal, offering tax-free growth and withdrawals for qualified expenses. Many states also offer a state income tax deduction for contributions.
Secondly, custodial accounts, like UGMA or UTMA accounts, provide broader flexibility for any financial goal, not just higher education.
You might also like to read: How to Raise Teens with Strong Money Management Skills
Thirdly, if your child has earned income, a Roth IRA for minors utilizing market driven, mutual funds or index funds, can be a strong tool to kickstart long-term compounding.
And lastly, Trump Accounts are a new addition as a wealth creation tool for children. Trump Accounts, also known officially as 530A IRAs, are a notable development in saving for children. These accounts allow for tax-deferred growth and can include contributions from family, employers, and even eligible government or philanthropic sources. For eligible children, there might even be an initial government deposit to kickstart things, though funds are generally locked in until the child becomes an adult.
Tip 2: Create a written wealth creation plan.
It’s very important to have a plan in place, emphasizing the importance of consistency and discipline. By not having a regular, dedicated savings or investment plan, many people miss out on the power of dollar-cost averaging, which helps smooth out market volatility and can lead to greater long-term growth. It’s important not just to wait around for events such as birthdays, where the children may receive some cash or when someone can scrape up enough money to put into a plan.
Stay dedicated and consistent in investing.
A fond phrase of mine is to pay yourself first. Most people focus on paying their bills first, and then trying to save whatever is left over—often with very little or even nothing left to invest. From my perspective, a more effective wealth creation plan is to pay yourself first and then pay the bills.
You might also like to read: Financial Literacy For Teens: Get Money In THEIR Hands
Tip 3: Protect the “Golden Goose.”
This is one of the most critical challenges parents face, and the Golden Rule here is to prioritize your own retirement. You can’t borrow for retirement, but your child can borrow for college or other future milestones.
A great approach is to automate your savings so that a portion goes directly to your retirement accounts first, and then allocate what’s possible to your kids’ funds.
The key here is to plan for saving for your own retirement first as well as secondarily, plan on saving for your children’s future. With proper planning and having your money work and grow for you, both of your goals can be accomplished. I would like to suggest it’s important to take care of the goose first, because without the goose, there are no golden eggs.
For an additional resource on teaching your teen essential life skills (including money management), we recommend Life Skills for Teens: How to Cook, Clean, Manage Money, Fix Your Car, Perform First Aid, and Just About Everything in Between by Karen Harris.
Parenting teens and tweens is a tough job, but you’re not alone. These posts might help:
The Best Ted Talks for Teens and Tweens To Help Them Learn To Adult
Seven Simple Consequences for Teens to Help with Discipline
House Rules to Teach Teens to Be Safe and Respectful
*This post may contain affiliate links where we earn a small commission for purchases made from our site.
