The Benefits of Investing a Lump Sum for Your Child
Updated: Dec 4, 2022
A child’s college tuition and education costs can be daunting, especially if you feel like you’re going to have to pay it all at once in 18 years. However, there are advantages to investing an entire lump sum up front.
One of the most important things you can do to prepare your child for higher education is to start saving early and often. That’s because the earlier you begin investing, the more time your money has to grow into a substantial sum — one that can easily help offset college costs when it comes time to pay them off.
Begin with an End Goal in Mind
When it comes to investing, the earlier you start, the better. In fact, even if you don’t have an extra penny in your savings account right now, there are ways to get started and set yourself up for success in the future. One way is by investing a lump sum – that is, investing all your money at once – into an investment account.
So what are some benefits of this kind of investment? By doing it as soon as possible and sticking with it over time, you can expect to grow your assets more quickly than if you were to invest smaller amounts over time.
Consider Their Age
Investing a lump sum for your child is one way to make sure that they have the financial freedom to live their life the way they want to. However, it's important to keep in mind how old your child is and what their goals are before you decide on this type of investment.
For example, if your child is seven years old, they may not have an idea of what they would like to do with their money. If you invest the money now, it may be hard for them to get out when they are older if they decide that's what they want.
On the other hand, if your child is seventeen years old and has some specific career goals in mind, investing now could be a great idea!
Look at Their Future Education Needs
If you have the ability to invest a lump sum on your child's behalf, then this should be done. There are four reasons why this is beneficial:
1) You can take advantage of compound interest over time;
2) You can avoid the risk of running out of money in retirement;
3) You will have more control over your child's education and
4) You will not have to worry about custodial expenses.
One thing to keep in mind is that tax considerations are different if you invest from an individual account versus from an employer sponsored retirement plan such as a 401k. Speak with your accountant or financial advisor before investing on behalf of your child.
Save the Tax-Free Money First!
Tax-free investment accounts, like 529 plans and Coverdell ESAs, are special types of accounts that you can use to save money for your child's education expenses. They are often referred to as 529 Plans. Some states offer their residents tax deductions or credits when they make contributions to one of these accounts.
Contributions to a 529 plan can be withdrawn free from federal income taxes as long as the funds are used for qualified education expenses. If you do not need the money right away, you may want to consider investing in stocks or bonds through your child's name.
This way, if he/she doesn't need it right away, they will have grown more than if they were just sitting in an account collecting interest.
Take Advantage of Employer Matching
If your employer offers an employer matching program, you should take advantage. Employer matching programs are a free way to save money and grow your retirement savings. When you contribute to your SIPP or other qualified retirement plan, your employer may also make contributions on your behalf.
The amount varies by company; some offer up to 100% match while others may offer 50%. If you don't sign up for the plan offered by your employer, it's like giving away free money!
Go Beyond Stocks and Bonds
Investing in your child's education should be one of the top priorities in your budget. However, you can't put all your eggs in one basket. There are many different ways to invest for your child and not all are as stable as stocks and bonds.
If you want to make sure that your hard-earned money will grow over time, then find out what other investment options exist that might be more suitable for the long-term. You could consider investing in life insurance policies or taking advantage of tax breaks like ISA's or SIPP's.
Don’t Worry About Losing Money on Fees
Some people worry about losing money on investment fees when they invest lump sums. However, the benefits of investing a lump sum outweigh any fees you might pay when you invest in your child's future.
First, if you put £5,000 into an investment with an annual return rate of 6%, it will be worth £6,358 in just 10 years. That is enough to cover the cost of college tuition at most schools.
And it won't even have to be used for college tuition because this money will grow over time and can be used for retirement or even a down payment on their first house. Second, if you leave the money in cash (or other low-interest investments), it will never grow like that.