5 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 (more on that later) 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. Taking money out before then usually results in an early withdrawal penalty. Terms can last anywhere from one month to five years. As of March 2024, annual percentage yields (APYs) well over 5% are available.
• 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. As of March 2024, rates are as high as 5.35%.
• 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. As of March 2024, APYs on money market accounts are up to 5.30%.

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. Over time, average annual returns for the S&P 500 have been around 10%. 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. Contribution limits vary, and you'll likely face an early withdrawal penalty for tapping your funds before age 59½. Required minimum distributions (RMDs) begin at age 73.
• Roth IRAs: These accounts are funded with after-tax dollars, so retirement distributions are tax-free. In fact, you can withdraw your contributions at any time without paying taxes or penalties. The same goes for investment earnings, as long as you're 59½ or older and have had the account for at least five years. Unless you have an inherited Roth IRA, RMDs don't apply.
• 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. However, you'll likely be taxed on investment gains during the year they're realized.
• 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. Once you turn 65, you can use HSA funds for whatever you want, without penalty. However, you'll be taxed on non-qualified withdrawals. You must be enrolled in a high-deductible health plan to contribute to an HSA.

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. These distributions are also exempt from federal income tax. State taxes may apply, though many states offer income tax deductions or credits for 529 contributions. You can open the account in your name and list your child as the beneficiary.

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. Annual contributions are limited to $2,000—and you can't get a state tax deduction or credit for contributions. You also can't contribute to a Coverdell ESA if you earn more than $110,000 ($220,000 for married couples who file their taxes jointly).

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. When they come of age, the account can be converted to a regular Roth IRA. Your child doesn't have to use that money strictly for retirement. They could withdraw contributions to pay for college or buy their first home.

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.