Could you imagine turning 18 or 21 years old and almost instantly being worth six figures? For some, that may have been the case, but for most people, it was far from the case. As a parent, you should strive to provide your child with a better life than you may have had, and part of being able to do so is setting them up financially. Custodial accounts are a great way to accomplish this.
Custodial accounts are savings and investment accounts that allow parents (or guardians) to invest on behalf of their kids (or dependents). Once a kid turns 18 or 21, depending on the state, the account legally belongs to the child. Custodial accounts have a lot of flexibility as there are no contribution or income limits, and you can withdraw at any time without facing penalties as long as it's used for the child's benefit.
Here's how you can use a custodial account to send your kids off to college with six figures.
Invest it and forget it
One of the greatest phenomenons in investing is undoubtedly compound interest, which occurs when the money your money makes begins to make money on itself. If you have a lump sum available to invest, you can manage six figures in your kid's custodial account by trusting in an index fund like the S&P 500 and letting time and compound interest work their magic.
Historically, the S&P returns around 10% annually long-term. If you were to make a one-time investment of $20,000 -- and not a single penny more -- and received 10% yearly returns for 18 years, you would have over $111,000. Even at a more conservative 8% annual return rate, you can accumulate just under six figures with a one-time $25,000 investment.
By no means does historical performance guarantee future performance, but an S&P 500 index fund is one of the more stable long-term investments in the stock market and tends to outperform funds managed by professional investors.
All it takes is consistency
A five-figure lump sum investment may not be feasible for most people, but that's perfectly fine because you can still send your kid off to college with six figures; it just takes consistency. By using dollar-cost averaging, which involves making regular investments at set intervals, you can take a slow-but-sure approach and achieve the same results. If you were to make $200 monthly investments into a fund returning 10%, you would have personally contributed $43,200 in 18 years, but the account total would be over $109,000.
You don't have to be rich to set your kids up financially, and you definitely don't need to be an "expert" investor -- you just need to be steady and intentional with your investing. If you get paid bi-weekly, consider investing $100 each paycheck into your child's custodial account and see the rewards pay off by the time they enter adulthood. They'll surely thank you, and you'll likely be cutting down on the amount of "Can I have some money?" texts you'll be receiving in the future... maybe.