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Investing Tips for Parents

Whether you’re welcoming your first child or already have kids at home, it’s never too late to start investing. Being strategic about how to invest can help you grow your wealth and reach your financial goals faster. Here are five simple investing tips for parents.

1. Consider Your Investment Needs First

Begin by asking yourself why you’re investing. This can help you sketch out an investment strategy and stoke your motivation. Your goals may include:

• Saving for retirement
• Padding your kids’ college funds
• Buying a home or investment property
• Starting a business
• Traveling

Your timeline and risk tolerance will determine the best way to approach each investment goal. For example, building your retirement nest egg will probably require a different strategy than saving a down payment for a house.

2. Understand Your Risk Tolerance

It’s always possible to lose money while investing, but the opposite is also true—and avoiding risk altogether could cut you off from potential gains. This is where your personal risk tolerance comes in.

While some investors may have no problem with market volatility, others might prefer a smoother ride. High-return investments typically carry more risk. That includes individual stocks, cryptocurrency, and real estate. Similarly, low-risk investments like bonds and certificates of deposit (CDs) tend to offer lower returns.

Having a higher risk tolerance might make you a more aggressive investor, and vice versa. But going too extreme in either direction is ill-advised. The rule of thumb is to stay diversified, which can help spread out investment risk. That involves holding a mix of high- and low-risk investments across different asset classes.

3. Think About Your Timeline

The amount of time your investments have to grow will play a big part in your investing strategies.

Short-Term Investing

When investing for a short-term goal, you’ll have less time to recover from bouts of market volatility. The following low-risk investments can help your money work harder without exposing you to too much risk:

• CDs: The money you put into a CD is meant to stay put for a predetermined amount of time. When that period ends, you’ll get your investment back, plus interest. Terms can last anywhere from one month to five years.
• High-yield savings accounts: This type of savings account allows your money to earn interest—and unlike CDs, liquidity isn’t an issue. Online banks tend to offer the most competitive APYs on high-yield savings accounts.
• Money market accounts: This low-risk investment combines features of a checking account and savings account. Your money will earn interest, and you’ll likely have a checkbook or debit card for easy access to your money.

Long-Term Investing

If you’re investing for the long term, you may feel comfortable assuming more risk (and trading liquidity for potential returns). That may involve holding more stocks than bonds. Below are investment vehicles that are designed for long-term saving:

• Tax-deferred retirement accounts: Retirement accounts such as 401(k)s and traditional individual retirement accounts (IRAs) allow for tax-deductible contributions. Your money then grows tax-deferred, which means you won’t pay taxes until you make withdrawals in retirement.
• Roth IRAs: These accounts are funded with after-tax dollars, so retirement distributions are tax-free. You can withdraw your contributions at any time without paying taxes or penalties.
• Brokerage accounts: This is an investment account you can open and fund with a stockbroker, online brokerage, or robo-advisor. Brokerage accounts don’t offer the tax benefits of a 401(k) or IRA, but you can expect more flexibility when it comes to withdrawing funds.
• Health savings accounts (HSAs): An HSA allows you to save for certain medical expenses. Contributions are tax-deductible, you’ll enjoy tax-free growth, and you won’t be taxed on withdrawals that are used for qualified health care costs.

4. Review Investment Options for Your Kids

Here are some investment options to help you financially prepare for your child’s future:

• 529 Savings Plan: A 529 savings plan is a state-sponsored college savings account. Your money will grow tax-free if withdrawals are used for qualified education expenses like tuition, room and board, and course materials.
• Coverdell Education Savings Account (ESA): This investment account is like a 529 savings plan in that your money will grow tax-free, and federal income taxes don’t apply to qualified withdrawals. But Coverdell ESAs tend to offer a wider variety of investment options.
• Custodial Roth IRAs: Roth IRAs can make sense for minors who have earned income. In 2024, you can contribute up to $7,000 or the equivalent of your child’s annual income—whichever is higher.

5. Look for Ways to Automate Investments

You can set up automatic monthly contributions to IRAs, brokerage accounts, 529 plans, and other investment accounts. If you have a 401(k), contributions are typically made through automatic payroll deductions.

Your employer might also contribute on your behalf, which is essentially free money. You can periodically increase your contributions as you move through your career. One guideline is to save 15% of your income for retirement during your 20s and 30s, then 20% in your 40s and beyond.

The Bottom Line

There are lots of ways parents can invest for their kids and themselves. The goal is to strike a balance between saving for big goals, like retirement, and shoring up your child’s financial future. The right investment strategy for you will depend on your timeline, goals, and risk tolerance.

Don’t be afraid to invite your child into the conversation—it could be a great opportunity to teach them financial literacy skills. That includes credit score basics. Once they turn 18, you can encourage them to set up free credit monitoring with Experian. It’s an easy, hands-off way for them to keep up with their credit report.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals!

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