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To Invest or Not To Invest the Baby Money

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I was reading My Journey to Millions last week and the topic of children accounts came up. Currently the kids, ages 21 months and 6 months, have savings accounts for money that was gifted by family and friends. It isn't a ton of money, but it adds up.

Obviously, it made sense to get them a savings account, which we did. That's where the money has sat since. The inflation monster nibbles away at it each day.

I think the question is obvious, should I invest this money for them? The people giving the money didn't give it with instructions. The kids themselves are too young to express their own wishes... or even understand the concept of money.

That leaves the decision up to me, right? It's a difficult thing investing money for other people. I obviously don't want to lose their money. It still seems like the right thing to do. The kids have no immediate need for the money and won't for a few years. This gives it some good time to grow.

The question becomes how to invest the money. Evan covers this in depth and settled on a blend of 70% stocks and 30% bonds. I like this idea a lot. The only downside that I can think of is that it isn't a lot of money, so I have to keep commissions and other investing related expenses low. A $10 commission might not seem like a lot, but if it's on $1000, that is 1% off the top, before we factor in expense ratios.

I think I'll grant the kids downside protection just in case there is a crash that never recovers. This way there is no chance that they lose the gift. Given the time horizon, I'm hoping they'll learn how awesome daddy was to take advantage of this thing called compound interest.

I never forget when I first learned about compound interest. I think I was 6 years old. I remember thinking that there has to be a catch, "Wait my money makes money doing nothing... and that money makes more money doing nothing?"

So let me turn it around and ask the readers. Do you invest baby money or just leave it in a savings account?

Last updated on July 28, 2014.

This post deals with: ... and focuses on:

Investing, Kids

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11 Responses to “To Invest or Not To Invest the Baby Money”

  1. TC says:

    I say invest it – To get your 70/30 blend, a 50/50 mix of Vanguard Lifestrategy moderate growth and growth funds should do the trick, so long as you have the $6k to meet the $3k min in each.

    I remember as a kid spending birthday money on toys I didn’t need (I already had a ton of toys). So keeping it locked away for a rainy day sounds like a good plan to me.

  2. Evan says:

    Well you know where I land on the issue! I think you would be doing a disservice to your children to keep it in pure cash. If the value of money is always eroding and you hand them half the value in 21 years it almost diminishes the gift that people so generously gave him or her.

    However, if you can double or triple that value of money (7% return doubles every 10 years)…you teach them a lesson AND they get to see the generosity of people.

    Next question…how do you title it lol

  3. Maurice Financial Trader and Writer says:

    Is investing 70 per cent on stocks for a 6 year old a good idea? The money we are investing for kids are generally for their higher education. So, isn’t it prudent to invest 70 per cent on safer avenues giving average return? Please correct me if I’m wrong. I do need this advice as I’m planning to invest for my child (who is only a toddler).

    • Lazy Man says:

      Maurice, I’d see a professional financial advisor about your situation. It’s impossible for me to comment without knowing your risk tolerance, how much money we are talking about here, and other factors.

      Perhaps you could treat it like it was retirement money and get into one of those target date funds that adjust over time to be more conservative as you get closer to needing it.

  4. Steve says:

    Unless it’s a lot of money (four figures at least) I wouldn’t bother investing it. I recommend just spending it on something for the kid in the near(ish) term. What would Grandma rather have, a tiny bit of delayed gratitude when her gift pays for a book in college, but Grandma’s not around any longer to appreciate it? Or a bike that the child can enjoy today and think about Grandma every time she uses it?

    Also, money lost to fees is just as gone as value eroded by inflation.

  5. RAnn says:

    I guess I’m a horrible mom. Money given to my kids at that age went into my bank account; period. I support the kids, buy them way more than what they need, and will see to it that they have what they need to successfully launch adult life. That $20 birthday check has been returned to them many times over.

    • Lazy Man says:

      I don’t know if that makes you a horrible mom RAnn. I think it also depends on a person’s financial situation. We don’t need that $20, largely because we’ve focused on our finances and got them in a good place.

      Steve, the money for the oldest is a little under four figures, so it might not be worth investing. Fortunately and unfortunately, we don’t get to buy much for the kids, the grandmas always come with multiple toys and clothes that they’ve bought as they long to shop and bargain hunt. We have the “good” problem of having too much stuff. I’d say that we could put the money towards an experience, but we cover that ourselves. For example, we aren’t going to use the baby money for our annual aquarium pass, we’d just use our money.

      So maybe it’s best to just let it sit and build a bit.

  6. Michele says:

    How about 529 plans? Or are you doing that already?

    • Lazy Man says:

      We’ve got some money in 529 plans, but it’s not a ton. We have the wife’s GI bill which will take care of much of the costs. My wife and I probably need to have a discussion of how much of the bill we want to foot. We agree that we want them to have a stake in earning their education so that they take full advantage of it.

      We don’t want to put their gift money in a 529 plan unless a person specifically says that they want it to go there. It’s not going to make a significant dent in what would be needed and I think it’s good for them to have some money to manage at a young age.

      We’ll see, I’m new at this parenting thing, and I certainly don’t have all the answers.

  7. […] few weeks ago, I wrote an article about whether I should invest my babies' money. I think the general consensus was that I should, especially because I'll personally make up for […]

  8. […] little more than a year ago, I wrote an article about whether or not to invest our babies' money. The advice was overwhelming. Since they aren't going to use this money (mostly birthday cash from […]

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