As a parent, it is natural to want to provide the best for your child. You want to instill good financial habits in them, and you may be considering ways to help them save and invest for their future. One option to consider is a custodial brokerage account. I feel this is a much better place to put any of that birthday money that the grandparents have given to your child.

A custodial brokerage account is a type of investment account that is held in the name of a minor, but is managed by an adult custodian until the child reaches the age of majority. This type of account can offer several advantages over a traditional savings account, especially when it comes to teaching children about long-term investing.

The first advantage of a custodial brokerage account is that it provides an opportunity for children to learn about investing at an early age. By starting to invest early, children can take advantage of compound interest and the power of long-term investing. They can also learn valuable lessons about diversification, risk management, and the importance of a long-term investment strategy.

Investing in low-risk ETFs such as VOO or SPY based on the S&P500 is a good starting point, as these are well-diversified and have historically provided strong returns over the long term. However, children may take greater interest in investing in individual companies that they are familiar with and interested in. Encouraging your child to research and invest in companies they are passionate about can further engage them in the investment process and teach them valuable research skills.

Another advantage of a custodial brokerage account is the potential for higher returns compared to a traditional savings account. While savings accounts offer safety and stability, they typically offer lower interest rates that may not keep up with inflation. In contrast, a well-managed brokerage account can potentially provide higher returns over the long term, leading to greater wealth accumulation for your child.

The importance of investing early and the potential for higher returns are ideas that are supported by some of the most successful investors in history. Warren Buffet, for example, famously advocates for starting to invest as early as possible and has stated that his favorite holding period is “forever.” Ray Dalio, founder of Bridgewater Associates, emphasizes the importance of diversification and risk management in his investing approach. John Bogler, founder of Vanguard, was a strong proponent of low-cost index funds and long-term investing. And Carl Icahn, well-known activist investor, has made a fortune by identifying undervalued companies and investing in them for the long term.

Milton Friedman, a Nobel Prize-winning economist, also emphasized the importance of long-term investing in his book “Capitalism and Freedom.” In it, he argues that a free market economy depends on a stable and consistent investment environment, and that long-term investors are crucial to achieving this stability.

In conclusion, a custodial brokerage account can be an excellent tool for parents looking to teach their children about long-term investing. While a savings account may provide safety and stability, it is unlikely to offer the same long-term advantages as a well-managed brokerage account. By encouraging your child to invest in low-risk ETFs and individual companies they are passionate about, you can help them develop good investing habits and set them up for a more secure financial future. With platforms like TDAmeritrade and Etrade making it easy to open and manage a custodial brokerage account, there has never been a better time to get started.