Planning for Baby's Financial Future

For those of you who don't know, our family is growing, we are expecting our 3rd little one any day now, so I thought this was a great time to share how I set up my kids for financial success from the start. The first thing I will be doing once baby gets here is opening up a custodial brokerage account through M1 Finance. I did this with my other kids, and I have to say it was one of the best decisions I have made. After a couple of years, you really start to see the money start to add up. Just dont forget to place it on auto deposit!

Soon to be a family of five!

Another option is the 529 educational plan but the use of those funds is limited for school expenses only. If that is what you want, then great, go for it. I like the custodial brokerage account because it gives my kids the flexibility to use that money for whatever their needs are when they are older. Maybe my kids get school paid for; that money in the brokerage account can stay in there and keep growing or it can be used to purchase a car, maybe my kids wont want to go to school and instead use the money to fund a business venture where they dont need to work a 9-5. Me personally I'll take the freedom a custodial brokerage account provides over a 529 educational plan any day.

What is a custodial account

A custodial account is a taxable investment account that is opened by an adult for the benefit of a minor. The adult who opened the account will manage the account until age of majority which is somewhere between 18 and 21 depending on the state and type of account. Although, the adult is managing the account, the child owns the assets. Once the child hits the age of majority, what ever that may be, the child can then have full access to the account and use the money however they want.

Types of Custodial accounts: UTMA & UGMA

These are two types of custodial account options. Uniform Transfer to Minors Act account (UTMA) and the Uniform Gifts to Minors Act (UGMA). The main difference is the type of assets you can hold in each. An UGMA account can hold cash, stocks, bonds, annuities, insurance policies and other types of investment securities, while the UTMA account can hold any type of asset not just investment products.

I know right!

Another difference between the two is when the child can access their account. In most states a minor can gain control of their UGMA account at the age of 18, while they must wait until age of 21 to gain control of an UTMA. When opening an account make sure to understand what kind of an account you are opening because that will affect when it can be accessed. Some states have different laws about these accounts so make sure to talk to a financial advisor or some other expert before opening an account. For my purpose of teaching my kids investing and saving for their future either of those accounts works just fine because for the time being i am only working with investments in stocks.

It's a lot easier than you might think to open up a custodial brokerage account. It's as simple as verifying some information and linking your bank account. Just keep in mind there are rules on how and when the money in this brokerage account can be accessed, so make sure to research this part thoroughly so you dont run into surprises later. As far as i understand once the money goes into this account you cant withdraw it unless the custodian is using it to pay for expenses that would directly benefit the child before the age of majority, otherwise the money cant be touched until it transfers over. Again, I would strongly suggest researching and familiarizing yourself with how this works before committing to anything.

Think about it carefully...

If you dont understand stocks very well this is a great time to educate yourself. This can be as simple as Googling low-risk stocks, index funds, safe stocks to invest in, etc. Not only will you be putting money aside for your kids' future, but you will also be educating yourself and becoming more financially literate. You might not get it right the first time, but keep learning because it's the only way to do/be better. I would also suggest learning more about the platform you choose to open an account with; this will make navigation and the process itself much friendlier. Youtube is your friend when it comes to learning how to use a platform or when learning more about its features. If you would like to use the M1 Finance platform feel free to use my referral link below and we could both receive a sign-on bonus of up to $100 to invest once your account is funded. https://m1.finance/_oAzbXvAUdVd yes, that was a shameless plug. I regret nothing!

Just a reminder, I am not a financial expert... I am just a guy on the internet. Please do your research and consult with a financial advisor before taking any financial action discussed in this blog.

Aside from the financial benefits this account provides, it also allows me the opportunity to talk to my kids about money and investing. I originally started showing the M1 investment pie to my little 3 year old. The pie is colorful and fun to look at so there was my hook, she still loves to look at it. Every time we look at the pie we go over whats happening i.e are we making money or losing money! I do this with with both my little ones and they get pretty excited and at this point this is all i can ask for. As they get older i will be adjusting my talking points to match their level of understanding. Hopefully this approach allows me to prepare my little humans for a successful financial life.

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